Question

Consider two competing firms in a declining industry that cannot support both firms profitably. Each firm has three possible choices, as it must decide whether or not to exit the industry immediately, at the end of this quarter, or at the end of the next quarter. If a firm chooses to exit then its payoff is 0 from that point onward. Each quarter that both firms operate yields each a loss equal to -1, and each quarter that a firm operates alone yields it a payoff of 2. For example, if firm 1 plans to exit at the end of this quarter while firm 2 plans to exit at the end of next quarter then the payoffs are 1,1) because both firms lose -1 in the first quarter and firm 2 gains 2 in the second. The payoff for each firm 1.
a. Write down this game in matrix form
b. Are there any strictly dominated strategies? Are there any weakly dominated strategies?
c. Find the pure-strategy Nash Equilibria.
d. Find the unique mixed-strategy Nash equilibrium.

Answer 1

Answer:

a) attached below

b)  ( T,T )

c) The Pure-strategy Nash equilibria are : ( N,E ) and ( E,N )

d) The mixed-strategy Nash equilibrium for Firm 1 = ( 1/3 , 0, 2/3 )

while the mixed -strategy Nash equilibrium for Firm 2 = ( 1/3 , 0, 2/3 )

Step-by-step explanation:

A) write down the game in matrix form

let: E = exit at the industry immediately

     T = exit at the end of the quarter

     N = exit at the end of the next quarter

matrix is attached below

B) weakly dominated strategies is ( T,T )

C) Find the pure-strategy Nash equilibria

The Pure-strategy Nash equilibria are : ( N,E ) and ( E,N )

D ) Find the unique mixed-strategy Nash equilibrium

The mixed-strategy Nash equilibrium for Firm 1 = ( 1/3 , 0, 2/3 )

while the mixed -strategy Nash equilibrium for Firm 2 = ( 1/3 , 0, 2/3 ) since T is weakly dominated then the mixed strategy will be NE

Assume that P is the probability of firm 1 exiting immediately ( E )

and q is the probability of firm 1 staying till next term ( N ) ∴ q = 1 - P.

hence the expected utility of firm 2 choosing E = 0 while the expected utility of choosing N = 4p - 2q .

The expected utilities of E and N to firm 2 =

0 = 4p - 2q = 4p - 2 ( 1-p) = 6p -2 which means : p = 1/3 , q = 2/3