2. (15 total points) Three mis are trying to sell photocopiers to the Paul Merage School ofBusiness. Offers are made in sequence and publicly announced.
2. (15 total points) Three mis are trying to sell photocopiers to the Paul Merage School ofBusiness. Offers are made in sequence and publicly announced. First Firm 1 offers, then Firm 2, then Firm 3. Suppose that price is irrelevant. Instead, the key issue is whether the contract will include service (i.e. maintenance). Each rm gets a prot of 5 if service is not included in the contract but only 1 if service is included (i.e. providing service is costly). If all offers are equal with respect to service (i.e. ifall offer service or if all offer no service), then Firm 1 gets the contract with probability .1, Firm 2 gets the contract with probability .4. and Firm 3 gets the contract with probability .5. Ifonly some of the offers include service, the offers that do not include service are rejected with certainty, and the rejected rms original probability of winning is split evenly among the remaining rms offering service. All rms know this information. For example: If Firm 1 does not offer service but Firms 2 and 3 offer service, then Firm l's probability of winning the contract falls to O. Firm 2's probability of winning increases to .45 : .4 + 1/3 (.l), and Firm 3's probability of winning increases to .55 : .5 + 1/3 (.1). a. Draw this game in extensive form (where payoffs are the expected profit to each rm). and solve for the Rollback Equilibrium. Show your work.
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