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I’m the worst at game theory but have to keep trying (i.e., help me write a test question)

I teach an online MBA managerial economics class and try to inject environmental content as much as I can (after all, we have the #1 ranked sustainable MBA program in NC). I'm terrible at game theory but I think I have found a WSJ article that helps (Tesla’s Price Cuts Are Roiling the Car Market): 

Tesla Inc.’s recent price cuts on its most popular models in the U.S. are reverberating through the car business, pressuring rivals and affecting purchase decisions for new- and used-car buyers. …

Tesla’s price cuts have drawn mixed reactions from investors and Wall Street analysts. Some suggested the move was made in response to waning demand. Others viewed it as Tesla squeezing competitors by sacrificing some of its strong operating-profit margins—which are larger than most car companies—while also lowering prices enough to qualify many models for a $7,500 federal tax credit.

A more recent article has Elon saying that they are going for market share and then will try to gouge Tesla owners with costly software updates (my interpretation). Here is a question I asked on a recent exam:

Refer to the WSJ article: “Tesla’s Price Cuts Are Roiling the Car Market”.

    1. From the article: “…lower Tesla prices are undercutting some competitors’ EVs just as those auto makers try to convince investors and car buyers that they are a viable Tesla alternative…”
    2. Draw and label a graph that depicts a demand curve and a supply curve in the market for Ford electric vehicles (EVs). (i) Illustrate on your graph the effect of a decrease in the price of Tesla EVs. (ii) Describe the impact on the equilibrium price and quantity of Ford EV automobiles as a result of the decrease in the price of Tesla EVs.
    3. Considering your answer in part (a), what happens to Ford’s EV profits if they leave price unchanged? What happens to Ford’s EV profits if they reduce their price to match Tesla?
    4. Thinking of this in terms of a repeated game, what is Ford’s next move? Use the concept of a trigger strategy in your answer.
    5. Draw and label a graph that depicts a demand curve and a supply curve in the market for Tesla EVs. Illustrate the effect of your answer in part (c) on this graph.

Any advice on how to make this question better is appreciated.

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  1. Glenn Cassidy Avatar
    Glenn Cassidy

    Another way to approach this is to suppose that there are economies of scale up to threshold production quantities that Tesla’s competitors have not yet achieved. Then, an alternative part d question would be to discuss long-term implications for Ford or for a startup company entering the EV market. This question on the exam offers an opportunity for follow-up discussion in class about the long-term public policy goal of seeing EV prices fall. Does a scenario as presented in this question complicate the issue, or should we welcome a price reduction like this? How might we evaluate this?
    Another question about Tesla could focus on their charging stations, and their original plan to allow only Tesla vehicles to use them. How does this create a network effect similar to Facebook, for example, losing money to gain market share in the beginning? Now that other brands may use the Tesla stations, how might Tesla use price discrimination to gain a network advantage? Related, a question could be asked comparing Tesla’s charging stations to Apple’s control of the market for apps on its phones, versus commonly agreed standards for internet connectivity that allow Windows or Apple or Linux machines to readily connect.

    Reply
  2. John Whitehead Avatar
    John Whitehead

    Glenn, thanks!

    Reply

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