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KOR101 – F2107 Due: 십일월 십칠일 금요일 Recording Homework 2: Practice as much as possible before recording your voice. You are REQUIRED to visit to the tutoring session at least one time. 월요일에 같이 영화를 봐요. 금요일에 친구하고 백화점에 가요. 주말에 도서관에서 책을 읽어요. 언제 한국어 수업이 끝나요? 어제 왜 전화 안 했어요? 친구하고 약속이 있었어요. 수요일에 학교에 갔어요? 아니요, 안 갔어요. 아팠어요. 올해 저는 생일 파티를 준비했어요. 아파트를 청소했어요. 그리고 빨래도 했어요. 한국 식당이 편의점 옆에 있어요. 저는 보통 산책하러 공원에 가요. ECONOMIC ANALYSIS The U.S. market in cellphone service is dominated by four firms: Verizon, AT&T Mobility, Sprint, and T-Mobile. Figure 1 shows the shares in this market. You can see percent, Sprint has 16 percent; and T- Mobile has 14 that Verizon has 35 percent of the market; AT&T has 33 percent. Another nine small firms share the remaining 2 percent. • In 2013, T-Mobile and AT&T increased the intensity of their competition . T-Mobile increased the value and cost of production of its plans but held prices, and so decreased its profit. AT&T cut its prices, which decreased its profit. . We can interpret this competition as a prisoners' dilemma game. Table 1 shows the payoff matrix (millions of dollars of profit ) for the game played by T-Mobile and AT&T. (The numbers are hypothetical.) This game is a prisoners' dilemma like that on p. 345 and has a dominant-strategy Nash equilibrium. If T-Mobile offers an increased value of service, AT&T avoids a larger loss by cutting its price; and if T-Mobile does nothing different (no change), AT&T increases its profit by cutting its prices and gaining market share. • So AT&T's best strategy is to cut prices. • If AT&T cuts its prices, T-Mobile avoids a larger loss by incurring a higher cost of offering its customers greater value plans; and if AT&T doesn't cut its price (no change), T-Mobile increases profit by offering its customers greater value plans. So T-Mobile's best strategy is to incur the higher cost of offering its customers greater value plans. Because the best strategy for AT&T is to cut price and for T-Mobile to incur the higher cost of offering its cus- tomers greater value plans, that is the equilibrium of the game. • The firms are in a prisoners' dilemma because each would be better off avoiding the contest on quality of service and price. But each firm can see that if it doesn't take its best ac- tion, the other firm will gain and it will lose. • The game we've just described is played only once, and both firms move at the same time. • But in the game played by T-Mobile and AT&T, the firms move sequentially and repeatedly. • If T-Mobile and AT&T adopt a tit-for-tat punishment strat- egy, it is possible that the current war between them will end and they will return to higher prices and larger profits. This market is one that affects everyone, and one that will expand as cellphones become ever smarter and used for more data-intensive activities. Others 2% Verizon 35% T-Mobile 14% T-Mobile's strategies Increase value No change -$1b -$2b Cut price -$1b $2b AT&T's strategies Sprint 16% $2b $0 No change AT&T 33% -$2b $0 Figure 1 Market Shares in Cellphone Service Table 1 T-Mobile and AT&T in a Prisoners' Dilemma 361 ECONOMICS IN THE NEWS Oligopoly Games in Cellphone Service AT&T Extends Price Cuts in Battle With T-Mobile for Data Users Bloomberg March 8, 2014 AT&T is cutting mobile-phone subscription charges for the second time in two months, seeking to hold on to smartphone customers amid a price war with T-Mobile. Starting tomorrow, AT&T customers can sign up for a Shared Value plan with 2 gigabytes of data for $65 a month, down from $80. Adding a second phone to the plan brings the price up to $90, down from $105. The price reduction comes a day after T-Mobile said it will double to 1 gigabyte the amount of data allotted to its $50-a-month Simple Choice package. AT&T cut its shared data plan for families by $40 last month as it seeks to keep pace with T-Mobile's aggressive pricing strategy. T-Mobile gained 2.1 million customers in the past three quarters, reversing its performance in 2012. The company offers a plan with 2.5 gigabytes of data for $60 a month for one phone or $90 a month for two phones. Over the past year, Bellevue, Washington-based T-Mobile introduced a series of pricing changes to shake up the industry, becoming the first carrier to offer customers quicker phone upgrades, payment financing, and international data and text-messaging at no extra charge. It also started a $450 credit program for users who switch from other ESSENCE OF THE STORY providers. V AT&T and T-Mobile use similar technology, AT&T, based in Dallas, is the second-largest U.S. which makes it easy for customers to switch wireless carrier, trailing Verizon Communications Inc. devices between their networks. T-Mobile is fourth, behind Sprint Corp. Competition The two firms are in a smartphone-service between AT&T and T-Mobile, which abandoned a price war. merger attempt in 2011, has intensified in part because • T-Mobile has gained 2.1 million customers by they use similar technology, making it easier for custom- increasing the value of its plans without raising ers to switch devices between their networks. prices. • AT&T has cut the prices of its plans. Scott Moritz, "AT&T Extends Price Cuts in Battle With T-Mobile for Data Users," Bloomberg, March 8, 2014" MyEconLab More Economics in the News 360
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Running head: MARKET GAME THEORY

1

Topic MARKET GAME THEORY.
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Introduction
An oligopoly is an older market model compared to a monopoly model. Instead of one
firm overriding the share in a market with more than one firm controlling markets, most firms
control the market and most of the resources of production. For example, in the phone industry,
Verizon and AT&T prominently the market. The game theory is a state where organizations
interact; though they enjoy different market shares, one firm takes advantage of the losses made
by firms trading in the same market to advantageously register trading gains. The paradox of the
prisoner dilemma, a common situation in the game theory, explains this phenomenon by stating
that each firm takes a beneficial course of action. However, firms working together produce an
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