January Essay Prompt

3. Two competing retail firms, Red Shop and Blue Mart, are studying potential locations for new stores in the
suburbs of a major city. Each firm must choose between a location north of the city and a location south of the
city. The payoff matrix is shown below, with the first entry in each cell indicating Red Shop’s daily profit and
the second entry indicating Blue Mart’s daily profit. Both firms know all of the information in the payoff matrix.
Blue Mart
North South
North $900, $1,800 $3,000, $3,500
Red Shop
South
$5,000, $4,000 $1,500, $1,000
(a) If Red Shop chooses a location south of the city, which location is better for Blue Mart? Explain.
(b) Is choosing a location to the south of the city a dominant strategy for Red Shop? Explain.
(c) If the two firms cooperate in choosing locations, where will each firm locate?
(d) Assume that the south suburb has enacted an incentive package to attract new business. Any firm that
locates south of the city will receive a subsidy of $2,000 per day. Redraw the payoff matrix to include the
subsidy.
STOP
END OF