Identify a real-world business example of sequential game in which a firm plays a role of leader by making strategic commitment.

• Answer two of the three exams on the next page.
• Answer each question in about 4 Power Point slides, so that the total size of your exam is about 9 slides (4 slides × 2 questions + title page). 11 or 12 slides are also fine. Please do not go beyond them. I also welcome 5 through 8 slides. I evaluate your exam based on “quality”, not on quantity.
• Try using figures, charts, and/or tables to make your exam viewable.
• Submit your exam to the folder of Moodle no later than February 6th.
• Start with your file name with your student ID. Don’t forget putting your name on the title page.
• I will not accept any questions during the exam period.
• The total score is 100 pts. Below is the breakdown:
✓ How well you understand economics theories in the questions: 40 pts.
✓ How well you apply the economics theories to real business examples: 20 pts.
✓ How concrete/rich are the evidences to support your arguments: 20 pts.
✓ How clear/readable are your arguments: 20 pts.
Question 1.In microeconomics basic theory, many economists believe that “perfect competition” is preferable to “monopoly” or “oligopoly”. At the same time, SCP theory, which is founded on microeconomics basic theory, suggests that firms should be in industries close to monopoly or oligopoly rather than in industries close to perfect competition.(1) Explain why microeconomics basic theory and SCP theory have such divergent views.(2) In perfect competition, firms cannot control market price and thus market price tends to be lower than that of monopoly and oligopoly. In some occasions, however, firms in oligopoly may decrease market price substantially. Explain why this could be the case using ideas of game theory. Further, identify a real-world example of “market close to perfect competition” and a real-world example of “oligopolistic market with price-cut-competition”, and compare their mechanisms. (Note: You cannot use examples discussed in the class.)
Question 2.In game theory, a firm under “(non-corporative) simultaneous game” may make a strategic commitment so as to change the situation from simultaneous game to “sequential game” in which it plays a role of leader. For attaining this objective, the firm’s strategic commitment must be “credible”.(1) Identify a real-world business example of sequential game in which a firm plays a role of leader by making strategic commitment.
(2) Discuss why the identified strategic commitment in your example is credible.
Question 3.Agency theory suggests that interest divergence and information asymmetry between players may incur “moral hazard” problem.(1) Identify a real-world business example to which “moral hazard” problem is applicable. Discuss why it could be the case. (You cannot use an example discussed in the class.)
(2) Based on your identified example in (1), discuss how changing “incentive structure” can mitigate the moral hazard problem.

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