Microsoft Word - Econ7020_Homework 3_2015_03_Fall.docx
The following payoff table depicts service competition between two hospitals in a southeastern city. These two hospitals dominate the market in this city. (Each payoff represents profit in millions of dollars.)
Suppose initially that no communication is possible between the firms, and each must choose its service strategy without any cooperation with each other. Further, suppose they can think of this as a one-time, non-repeated game.
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Hospital B's Service
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Basic
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All-purpose
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Specialty
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Hospital A's Service
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Basic
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5,7
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5,4
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12,6
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All-purpose
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4,5
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8.7
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7.4
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Specialty
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6,10
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3,12
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3,3
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a. Does either hospital have a dominant strategy (or any dominated strategy)? Assuming they determine their strategies independently of one another, what are the hospitals' respective (Nash) equilibrium strategies? Explain briefly.
b. Suppose instead that the hospitals merge and, therefore, coordinate their service decisions. Which actions should they take? Explain briefly.
c. What general economic reasons might there be for a hospital merger to generate an increase in total profit? Would the hospitals' customers
be likely to benefit from the merger? Under what circumstances? Explain carefully.