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Exercise 1: Simultaneous Games Two toy producers contemplate selling a new product in the same marketplace. The products sold by the two firms are similar,
Exercise 1: Simultaneous Games Two toy producers contemplate selling a new product in the same marketplace. The products sold by the two firms are similar, although firms may choose a distinctive level of quality. Each can choose to go for the high end of the market (high quality) or the low end (low quality). A marketing analyst predicts that, for all possible combinations of choices, the resulting profits in year 2024 will be as presented in the payoff matrix: Firm 2 Low quality High quality Low quality -2, -3 80, 30 Firm 1 High quality 10, 60 6, 6 For example, if Firm I and Firm 2 both choose to sell a low quality product, then Firm I will lose 2 million Euros, and Firm 2 will lose 3 million Euros. (a) What's the Nash equilibrium of this game? (b) Firms may choose to cooperate by coordinating their choices, in order to maximize joint profits (that is, the sum of individual profits). In that case, what is the cooperative outcome? (c) Which firm benefits most from the cooperative outcome? How much would that firm need to offer the other to persuade it to coordinate the choices
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