8. Collusive outcome versus Nash equilibrium

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Consider a remote town in which two restaurants, All-You-Can-Eat Cafe and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning.

If neither restaurant cleans, each will earn $11,000; alternatively, if they both hire workers to clean, each will earn only $8,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $16,000, and the other restaurant will make only $4,000.

Complete the following payoff matrix using the previous information. (Note: All-You-Can-Eat Cafe and GoodGrub Diner are both profit-maximizing firms.)

		GoodGrub Diner
		Cleans Up	Doesnt Clean Up
All-You-Can-Eat Cafe	Cleans Up	,	,
	Doesnt Clean Up	,	,

Points:

Close Explanation

Explanation:

If All-You-Can-Eat Cafe and GoodGrub Diner decide to collude, the outcome of this game is as follows: All-You-Can-Eat Cafe selector 1

cleans

does not clean

and GoodGrub Diner selector 2

cleans

does not clean

.

Points:

Close Explanation

Explanation:

If both restaurants decide to cheat and behave noncooperatively, the outcome reflecting the unique Nash equilibrium of this game is as follows: All-You-Can-Eat Cafe selector 1

cleans

does not clean

, and GoodGrub Diner selector 2

does not clean

cleans

.