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Game Theory

In: Business and Management

Submitted By bonitaqb
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Q1. How would the credit card opportunity compare to focusing on the core business of banking services for the affluent?

By launching a credit card, Alpen Bank could exploit Romania’s rapid economic growth and rising incomes, which is especially the case for middle- and upper-middle class. Since Alpen has already build a good reputation in serving affluent, who cares more about image and less price sensitive, it will cost less in advertising their credit card service and generate more profit if Alpen positioned its credit card as high end premium products. Moreover, Alpen enjoys a second mover advantage in launching credit card. Regardless of the low credit card utilization and merchants’ cash priority attitude, competitors had been marketing credit cards for several years already, which assist building customers’ need awareness and introduce the utility and purposefulness of the card. Alpen could further market its product on this basis with less effort and lower costs. (Please refer to appendix A for detailed statistical description)

Q2. Please choose between open or sealed bid auctions and justify why you are using it.

Alpen Bank should utilize open auction. The value of Alpen’s credit card corporation is largely composed with common value, which is dispersed among bidders. Assuming all four bibbers are risk neutral and are experienced bidders, they could adjust their pricing strategy in response to rival’s latest bidding price in an open auction. Such new information will positively affect bidder’s next pricing. Owing to the fierce competition and strong willingness of corporation, the price may be bid up beyond their real value, but to a small extent because of winner’s curse concern. Yet, for the case of sealed bid auction, bidders are more rational since it is a simultaneous game and one could not observe the actions of rivals. To avoid winner’s curse, bidders will bid on the fair value or even on the value lower the estimated fair value. Thus, in terms of estimated auction revenue, Alpen should adopt open auction.

Appendix A

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