4.6 You and your competitor are close to identical:

You both own one undeveloped lot in each of two towns that are eager for the lots to be developed. The first town, Gainesville, offers tax concessions to the owner of the first lot developed in Gainesville, so that the owner makes a $20 million economic profit. The second town, Ocala, offers a smaller tax incentive package, so that the owner of the first lot developed in Ocala makes a $10 million economic profit. Both towns structure the tax rebates so that they apply only when one lot is developed in their town; if the second lot in their town is developed, all tax concessions are lost, and the owners of both lots will make a $2 million economic profit. You and your rival each have enough financing to develop only one lot and developing a lot is the only option for both you and your rival. Before you can start the project, both you and your rival need to have your building plans approved. Suppose that your rival is first in line in both cities to submit a building plan.

a. What is the game tree for this game? What is the Nash equilibrium?

b. Before your rival submits a building plan, you announce that you will develop your lot in Gainesville. Is this announcement credible?

What is the Nash equilibrium of this game?

c. Before your rival submits a building plan, you (truthfully) announce that you have sold your lot in Ocala to someone who has no immediate plans to develop it. What is the Nash equilibrium of this game?

d. Compare your answers to parts b and

c. Are they similar or different? Why?