Suppose that Panasonic and Zenith are the only two firms that can produce a new
ID: 1236435 • Letter: S
Question
Suppose that Panasonic and Zenith are the only two firms that can produce a new type of high-definition television. The payoffs in millions of dollars from entering this market are as follows:
-If both enter, each has a payoff of -40 -If one enters and the other does not, the entrant gets 250 and the other gets 0. -If both stay out, their payoffs are each 0.
a) Construct a normal form game with these payoffs.
b) What is/are the Nash equilibria if both move simultaneously?
c) Suppose the US gov't agrees to give Zenith a lump sum payment of $50 million if it enters. Both still move simultaneously. What is/are the Nash equilibria now?
d) If Zenith does not receive a subsidy but has a head start over Panasonic, what is the Nash Equilibrium?
Explanation / Answer
a) Normal form is simple viewing of this game. In this game of 2 players, If both enter, both pay $40 million If either enters, he gets $250 million If both opt out, both gets $0 b) The nash equilibrium when both enter is that both pay $40 million. (First square) c) Nash equilibrium now will be, Panasonic pays $40 million, while Zenith earns $10 million d) Initially zenith is earning $250 million. Now if P moves in 2 conditions arise i) Z stays so it has to pay $40 million ii) Z moves out and it gets $250 million Now, since in nash equilibrium, both firms don't collude, so both will stay ( i) ) and both will have to pay $ 40 million