Question

You determine that there are enough nostalgic baby-boomers in your town to make a retro soda shop profitable. While you are making plans to open one, you hear of a potential rival with the same idea. You are sure that one shop would be profitable but that two would mean that both lose money. You recognize that, in this market:

a. the elements of a coordination game are present.
b. there are multiple equilibria.
c. there may be a Grimm Trigger strategy.
d.there is a first-mover advantage.

Answer 1

In this market, the elements of a coordination game are present, there may be multiple equilibria, a Grimm Trigger strategy could be used, and there is a first-mover advantage. All the given options could be recognised.

Step-by-step explanation:

1. In this scenario, the market exhibits elements of a coordination game. A coordination game occurs when multiple players have the same preferences, and their actions need to be coordinated in order to achieve a desirable outcome for all parties involved. Here, the two potential soda shops need to coordinate their actions to avoid saturating the market and leading to losses for both. It is crucial for them to communicate or find a way to mutually agree on a plan.
2. Multiple equilibria may be possible in this situation. Equilibrium refers to a stable state where all players have made their optimal decisions. In the case of the soda shops, there could be different equilibrium points where both shops coexist and share the market, each capturing a significant portion of the nostalgic baby-boomer customers.
3. A Grimm trigger strategy may also come into play. A Grimm trigger is a retaliatory strategy used in game theory. If one player deviates from the agreed plan, the other player responds with a harsh punishment to discourage further deviations. This type of strategy can help maintain cooperation and prevent losses for both soda shops.
4. Lastly, there is a potential first-mover advantage in this market. Being the first to open a retro soda shop can give a significant advantage in terms of capturing customers' attention and establishing a strong brand presence. If one shop successfully becomes the go-to destination for nostalgic baby-boomers, it might be challenging for the second shop to attract the same level of customer loyalty.