# commodity pricing and payoff estimation

1. Based on the information provided in the case, illustrate the pricing game between Sony and Microsoft using a 2-by-2 payoff matrix when Sony and Microsoft charge for their games \$399, or lower price to \$299 as their price competition strategy.
2. Given the price information given in Exhibits 1 and cost information for both companies in Exhibits 2 & 3, find the average variable cost of making a video game produced by Sony and Microsoft.
3. Find the per unit and total video contribution margins for each company when they charge \$399 for Sony’s PS3 video game and Microsoft’s Xbox video game.
4. Calculate the pay-offs(profits) when each firm charges \$399, Microsoft charges \$399, but Sony charges a lower price of \$299, when Sony charges \$399 and Microsoft charges \$299, and both charge \$299, In other words, fill out the pay-offs in each of the four quadrants
5. Assume that the demand curves for the games is linear. A) Calculate the own point price elasticities of demand for video games implied by the data at prices of \$299 and \$399 for both Sony and \$399 for both Sony and Microsoft and B). Did Sony and Microsoft make the correct of cutting the price of their game from \$399 to \$299? C) Justify your answer.

Q#1. All you need to do is to sketch an empty pay-off matrix with 2 firms (Sony and Microsoft) and 2 strategies (charging \$399 or reducing price to \$299 by either firm) which looks like Table 12.1 on page 389 of the textbook.

Q#2 . You are asked to calculate the AVC for both Sony and Microsoft when they both charge \$399, Sony charges \$399 and Microsoft reduces to \$299, when Microsoft charges \$399 and Sony reduces its price to \$299, or when both Microsoft and Sony reduce price to \$299 based on Exhibits 2 &3. Why is this? To determine the per contribution margin (per unit profit) =Price-AVC ) and total contribution margin(Total profit) = (Price-AVC)Q. These values will be used to fill out the pay-off matrix when both use the same strategy (in cells 1 and 4) or an alternative strategy (cell 12, or cell 21).

Q#3 Determine the contribution margin (per unit profit) =Price-AVC and Total contribution margin (Total Profit) = (Price-AVC)Q based on Q#2. These values will be used to fill out the pay-off matrix when both firms are using the same strategy or an alternative strategy.

Q#4 Fill out the pay-off matrix based your calculations for Q# 3.

Q#5. Calculate the price elasticity demand Ep for Sony and Microsoft when each reduces own price from \$399 to \$299. Based on the value of the Ep for each firm, did each firm make the correct decision, i.e. did reducing the price by each firm result in an increase of their operating revenue?

If you found that Ep for both > 1 in absolute terms, then did the price reduction result in an increase in the total revenue? If that’s is the case, then each firm made a correct decision.