Two firms dominate a market. Each faces three choices. They can remain their current size (not expand), they can make a small expansion, or they can make a large expansion. If both firms make a large expansion, the excess output wipes out their profits. The following shows the payoff matrix:

a. What choice will the firms make if they have to commit at the same time (assume they cannot contract with each other)?

b. What choice will they make if Company A makes the first choice and, then, Company B follows.

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Payoffs shown as: B's Payoff, A's Payoff Company B Not Expand Small Expansion Large Expansion Company A Not Expand Expansion 36, 36 40, 30 36, 18 Small Expansion 30, 40 32, 32 24, 16 Large 18, 36 16, 24 0,0