Two major media streaming services, Intermovies and Walter X, are considering whether to maintain or increase their monthly subscription rate. Since a significant percentage of their customers will sign up for a whole year, they will be unable to change their rates for at least a year once they set them. The relevant payoff matrix appears below for their daily profits.
Walter X
Maintain Increase
Intermovies Maintain $1,200, $900 $900, $800
Increase $950, $1,150 $1,100, $1,000
(a) Does Walter X have a dominant strategy? Explain.
(b) Are Intermovies and Walter X likely to have many other competitors? Explain.
(c) If Walter X decides to maintain its monthly subscription rate, what is the better price move for Intermovies?
(d) What might preserve the supernormal profits of Intermovies and Walter X in the long run?
(e) What is the profit of each firm in any Nash equilibrium/equilibria?
(f) A new Federal Trade Commission tax regulation will cost each firm $100 per day if the firm increases its subscription rate. Draw a new payoff matrix to reflect this tax.
(g) What are Intermovies' and Walter X's dominant strategies (if any) after the tax?
i. Intermovies
ii. Walter X
(h) If the firms do not cooperate after the tax and act simultaneously, what will their new profits be?
