Suppose there are two firms (F1 and F2) producing identical product competing for market share and each of which would like to dominate the other, if possible. They each faced a choice between defending and cooperating. When either defends or both cooperate, neither is able to dominate the other. Assuming these preferences are reflected in their profit pay-offs. If both the players choice to defend, their profit will be 1,500 each. When one Firm defends and the other cooperates their profit level will be 5,000 and 1,000 respectively. Similarly, when both cooperate they end up with profit level of 3,000 each. With this in mind: a. Represent the above game in normal form/strategic form. b. Identify the dominant strategy for both firms and the dominant strategy equilibrium. c. Is the above equilibrium Nash equilibrium? Is it Pareto efficient allocation? Why? d. Assuming the game is one-shoot game and Firm 1 moves first represent it in extended form.
Suppose there are two firms (F1 and F2) producing identical product competing for market share and each of which would like to dominate the other, if possible. They each faced a choice between defending and cooperating. When either defends or both cooperate, neither is able to dominate the other. Assuming these preferences are reflected in their profit pay-offs. If both the players choice to defend, their profit will be 1,500 each. When one Firm defends and the other cooperates their profit level will be 5,000 and 1,000 respectively. Similarly, when both cooperate they end up with profit level of 3,000 each. With this in mind: a. Represent the above game in normal form/strategic form. b. Identify the dominant strategy for both firms and the dominant strategy equilibrium. c. Is the above equilibrium Nash equilibrium? Is it Pareto efficient allocation? Why? d. Assuming the game is one-shoot game and Firm 1 moves first represent it in extended form.
Chapter15: Imperfect Competition
Section: Chapter Questions
Problem 15.7P
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Question
. Suppose there are two firms (F1 and F2) producing identical product competing for
market share and each of which would like to dominate the other, if possible. They each
faced a choice between defending and cooperating. When either defends or both
cooperate, neither is able to dominate the other. Assuming these preferences are reflected
in their profit pay-offs. If both the players choice to defend, their profit will be 1,500
each. When one Firm defends and the other cooperates their profit level will be 5,000 and
1,000 respectively. Similarly, when both cooperate they end up with profit level of 3,000
each. With this in mind:
a. Represent the above game in normal form/strategic form.
b. Identify the dominant strategy for both firms and the dominant strategy equilibrium.
c. Is the above equilibrium Nash equilibrium? Is it Pareto efficient allocation? Why?
d. Assuming the game is one-shoot game and Firm 1 moves first represent it in extended
form.
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