There are two Ford dealerships in town: Jessica\'s and Jeffs. Each of these new
ID: 1132362 • Letter: T
Question
There are two Ford dealerships in town: Jessica's and Jeffs. Each of these new car dealers have three alternative strategies that they could pursue: (1)highlight. Each of these new car dealers have three alternative strategies that they could pursue: (1) highlight service department quality: (2) be the low-price deer on all automobile sales; or (3) hire a well-known sports star and engage in extensive advertising in outlying small towns and rural areas. The payoffs (profits) of these strategies are listed below, with Jessica's profits being the first number in each cell Jeffs ervice 4, 33 6, 27 Low Cost 18, 36 4, 30 30, 24 dvertising 15, 42 18, 24 12, 18 essica's ervice Low Cost dvertising a) Does either firm have a dominant strategy? How about a dominated strategy? If so, explain why and what the implications are for their strategy b) What do you predict will be the outcome of this strategic interaction between these two firms? i.e. what strategy will each firm choose? Briefly explain whyExplanation / Answer
a) Neither of the firm have a dominant strategy. It is so because,
Both Jeff and Jessica change their strategy according to the strategy of the other player. In simple words, Both of them choose their action according to the action of the other player.
As we knw hat the dominant strategy is the strategy, which player must have to choose irrespective of what other plyer chooses. But there is no such strategy here in this game for any of the player.
When Jeff chooses service, the best strategy for Jessica is to choose LOw cost as it give her highest payoff among all the 3 when jeff choose Service.
When Jeff chooses Low cost, the best strategy for Jessica is to choose Advertising as it gives her more payoff among the 3 when Jeff chooses LOw cost.
When Jeff chooses Advertising, the best strategy for Jessica is to choose Low cost as it gives her more payoff among the 3 when Jeff chooses advertising.
IT means that Jessica has no dominant strategy.
Similarly For Jeff;
When Jessica chooses service, the best strategy for Jeff is to choose Advertising as it give him highest payoff among all the 3 when jeff choose Service.
When Jessica chooses Low cost, the best strategy for Jeff is to choose Low csot as it gives him more payoff among the 3 when Jeff chooses LOw cost.
When Jessica chooses Advertising, the best strategy for Jeff is to choose Low cost as it gives him more payoff among the 3 when Jeff chooses advertising.
IT means that Jeff has no dominant strategy.
b) Nash equilibrium:
When Jessica chooses service, the best strategy for Jeff is to choose Advertising as it give him highest payoff among all the 3 when jeff choose Service and when Jeff chooses Advetising , the best strategy for Jessica is to choose Low cost because it gives her higher payoff.
As both of player have different strategy it is not a nash equilibrium.
When Jessica chooses Low cost, the best strategy for Jeff is to choose Low costt as it gives him more payoff among the 3 when Jeff chooses LOw cost. Jeff chooses Low cost the best strategy for Jessica is to choose advertising.
So it is also not a nash equilibrium.
When Jessica chooses Advertising, the best strategy for Jeff is to choose Low cost as it gives him more payoff among the 3 when Jeff chooses advertising. When Jeff is to choose Low cost the best strategy for Jessic is to choose advertising.
It is a nash equilibrium,
Jessica --- Advertising implies Jeff --- LOw cost
Jeff ---- Low cost implies Jessica --- Advertising.
Both will come at a singe outcome,
jessica - advertising and Jeff low cost.
Outcome of this strategic interaction between the two firm is (advertising, low cost).