Explain the use of a limited pricing strategy

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Reference no: EM13183177

The New York Times reports that Wal-Mart has decided to challenge Netflix and enter the online DVD by mail market. Because of economies of scale, Wal-Mart has a slight cost advantage relative to Netflix. Wal-Mart is considering the use of a limited pricing strategy. They can enter the market by matching Netflix on price. If they do, and Netflix maintains its price, then both firms would earn $5 million. But, if Netflix drops its price in response, then Wal-Mart would have to follow and Wal-Mart would earn $2 million and Netflix $3 million. Or, Wal-Mart could enter the market with a price that is below Netflix's current price, but above Wal-Mart's marginal cost. If it does, Wal-Mart will earn profits of $0 million and Netflix will earn profits of $2 million. Or it could keep its present price. If Netflix keeps its present price, then Wal-Mart will either keep its present price and earn $6 million (while Netflix earns $4 million). Or, Wal-Mart will increase its price and earn $2 million, while Netflix would earn $6 million.

a. Draw the game tree and solve it.
b. Draw the game's payout matrix form and identify any Nash equilibrium(s).

Reference no: EM13183177

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