11. Kane and Raven own dispensaries that sell marijuana at either an average price or a below average price. If
they both charge an average price, they will each earn high profits of $10. If one charges an average price
while the other charges a below average price, the below average price seller will get all the business and
earn a huge profit of $11 while the average price seller will only earn $8. If they both charge below average
prices, their customers get great deals and the merchants each earn a modest profit of $9.
a. Draw the extensive form of the game between Kane and Raven. Assume that Kane moves first and can
choose an average price or a below average price. Raven then follows with an average price or a below
average price.
b. Find the equilibrium outcome in the battle between Kane and Raven.
c. In a series of wild TV commercials, Kane announces, "Kane will not be undersold! Find a better price, and I
will match it!" Raven 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 new equilibrium outcome in the battle between Kane and Raven. Has the price-matching guarantee
been good for consumers?
