Crazy Eddie and Loopy Larry are two electronics merchants, who sell plasma TVs at either a high price or a low price. If they both charge a high price, they will each earn high profits. If one charges a high price while the other charges a low price, the low-price seller will get all the business and earn a huge profit. If they both charge low prices, their customers get great deals and the merchants each earn a modest profit.
a. Draw the extensive form of the game between Crazy Eddie and Loopy Larry. Assume that Crazy Eddie moves first and can choose a high price or a low price. Loopy Larry then follows with a high price or a low price.
b. Find the equilibrium outcome in the battle between Crazy Eddie and Loopy Larry.
c. In a series of wild TV commercials, Crazy Eddie announces, "Crazy Eddie will not be undersold! Find a better price, and I will match it!" Loopy Larry responds with the same offer. Redraw the game these two cutthroat competitors play, but give each player the chance to match his competitor's price if he prices high and his competitor prices low.
d. Find the equilibrium outcome in the battle between Crazy Eddie and Loopy Larry. Has the price matching guarantee been good for consumers? Is price-matching indicative of intense competition?