Question:
Suppose Securitex is a small firm that has developed a new anti-theft device for automobiles. Securitex currently sells its device online and earns profit of $7 million per year. GM is considering installing Securitex's system on its automobiles. The two firms first however, must bargain over what price GM will pay Securitex for its software. GM chooses how much to offer Securitex for its system and then Securitex chooses whether to accept the offer and install its system on GM's automobiles. The strategies and corresponding profits for GM (GM) and Securitex (SX) are depicted in the decision tree to the right. Profits are in millions: and GM's payoffs represent the additional profit it can earn on its automobiles with Securitex's anti-theft system. What is the subgame-perfect equilibrium?
A. The subgame-perfect equilibrium is for GM to offer a high price and for Securitex to reject the offer.
B. The subgame-perfect equilibrium is for GM to offer a low price and for Securitex to accept the offer.
C. The subgame-perfect equilibrium is for GM to offer a high price and for Securitex to accept the offer.
D. The subgame-perfect equilibrium is for GM to offer a low price and for Securitex to reject the offer.
E. A subgame-perfect equilibrium does not exist for this game.
Answer:
The correct option is;
C. The subgame-perfect equilibrium is for GM to offer a highhigh price and for Securitex to accept the offer.
Explanation:
A subgame perfect equilibrium is a improvement of a Nash equilibrium implemented in dynamic games (i. e. the interactions between GE will take place time and over again and their decision at a point will have an effect on the present and upcoming returns
A subgame perfect is a strategy profile is that constitute a Nash equilibrium of all possible subgames of the actual game.
