In the Judo Economics case, you are asked to solve the gameplayed between Kiwi (the entrant) and American Airlines (theincumbent) under the following assumptions: (a) Each buyer has awillingness-to-pay of $200 for one unit of either the incumbent’sor the entrant’s product; (b) Both the incumbent and the entranthave a $100 unit cost of serving buyers. As we saw in class, youshould use the “look ahead, reason back” method to solve the game.Based on the game tree we discussed in class, when Kiwi looksahead, it realizes that AA has only two pricing options: (1) Charge$200 and sell to 100–N consumers, where N is the number ofconsumers targeted by Kiwi; or (2) Charge a price slightly lowerthan Kiwi’s and sell to the entire market. Kiwi wants to select aprice ( K p ) and a target (N) that makes AA opt for alternative(1), otherwise Kiwi won’t sell to anyone. For example, if Kiwitargets 30% of the market (N=30) and charges $130, you cancalculate AA’s profit under each alternative as follows:Alternative (1): Profit = $200 x (100 – 30) - $100 x (100 – 30) =$7,000 Alternative (2): Profit = $130 x 100 - $100 x 100 = $3,000(notice that we set AA’s price to $130, the same as Kiwi’s price.Technically, AA’s price should be a little less than $130, but itwouldn’t change the solution to the problem). So when N=30 andKiwi’s price is $130, it is better for AA to charge $200. Kiwi’sproblem is to choose a price/target combination that maximizes itsprofit under the constraint that it gives AA an incentive to choosealternative (1). AA will choose alternative (1) when it generatesat least as much profit as alternative (2), that is: (200 100) 100? × ?? ? × ( N p ) ( K 100 100 ) , where K p is the price chargedby Kiwi. Your task is to find a solution to this game, that is, theprices charged by Kiwi and AA and the number of consumers targetedby Kiwi.

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Kiwis problem is to choose a price and target that maximizes its profit under the constraint th... View the full answer