8. Two oligopolistic aluminum manufacturers are engaged in bitter competition with one another.

The biggest firm, Big Aluminum Giant (BAG), is deciding whether to expand capacity or hold the line. The smallest firm, Little Aluminum Giant

(LAG), is also considering expansion. The table below shows payoffs for the firms under various scenarios:

a. What is the Nash equilibrium outcome in this game of capacity expansion? Why? How does dominance play a role in arriving at your answer?

b. Suppose the game is played sequentially, with BAG moving first. What is BAG’s best strategy? Does it lead to the same equilibrium you found in the simultaneous game?

Transcribed Image Text:

Don't BAG Expand Expand Don't 3,4 2,3 LAG Expand Expand 4,2 1,1