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Modify this first game's payoffs by introducing a warranty in the form of contract damages: Dairy agrees to pay Processor $3 whenever Processor buys milk
Modify this first game's payoffs by introducing a warranty in the form of contract damages: Dairy agrees to pay Processor $3 whenever Processor buys milk from Dairy AND Dairy tests Low instead of High. The goal of the warranty is to perturb, or alter, the payoffs of the game without a warranty in order to get closer to an efficient cost- benefit payoff that adds up to $12. Draw the extensive form for the game with the warranty. Find the subgame perfect equilibrium for this game. Is this subgame perfect equilibrium point efficient in the cost-benefit sense, or not? Why, or why not? Hint: The introduction of the warranty redistributes payoffs in some cells in the normal form subgame and thereby influences the firms' behavior in the subgame. Your answer should carefully present all the diagrams and versions of the normal form appropriate (e.g. before and after eliminating dominated strategies should that occur)
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