Chapter 10, Problem 14PAE

Two car producers, Firm A operates in Country A and Firm B operates in Country B, are considering producing a new 8-seater Multi-Purpose Vehicle (MPV)for the international market. The payoff matrix is as follows (payoff values are in millions of dollars). The above payoffs imply that the international market demand is large enough to support only one producer. If both firms produce, both will sustain a loss.   (i) Explain and solve for the Nash equilibrium in this game.   (ii) Suppose the government of Country A decides to subsidise Firm A with $25 million if it produces. Revise the payoff matrix to account for this subsidy. What is the new equilibrium outcome? Compare the two outcomes and discuss the effect of the subsidy.

Consider the following entry-deterrence game. A potential entrant has two strategies, “Enter” or “Stay Out”. An incumbent firm can either Price Low or Price High, depending on whether they want to try to fight or accommodate the entrant. (The Price Low option could be a limit price, for example). Suppose if the entrant Enters and the incumbent Prices Low, both firms lose $-1M. If the entrant enters and the incumbent Prices High, each firm earns $2M. If the Entrant doesn’t enter, the incumbent earns $4M and the entrant earns $0. a)Using the concept of Nash Equilibrium, what are the predicted strategies and profits? Set up a game box or tree and explain your reasoning. b) Give an example of a different profit outcome that would lead to a different Nash Equilibrium. (From this, you can see that sometimes deterrence is effective and sometimes it isn’t, depending on the profits).