Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Need help answering this question Two firms, Firm 1 and Firm 2, are competing with each other in a market with the objective of maximizing

Need help answering this question

image text in transcribed
Two firms, Firm 1 and Firm 2, are competing with each other in a market with the objective of maximizing their own profit. Each firm must choose whether or not to advertise their product, which is costly but can increase the firm's sale. If neither firm advertises their profits are equal to 18 and 13 for Firm 1 and 2, respectively. If both firms advertise their profits are equal to 10 and 12 for Firm 1 and 2, respectively. If Firm 1 advertises but Firm 2 does not, then their profits are 20 for the former and 7 for the latter. If Firm 2 advertises but Firm 1 does not, then Firm 1 gets a profit of 9 and Firm 2 a profit of 17. a) Write down the strategic form of this game. b) Find the Nash equilibrium (there is only one). c) Find the cooperative outcome. Explain why it is not strategically stable. Now, suppose that instead of competing with each other only once, the two firms share the market in the way modeled above indefinitely. After each period, both firms can tell what occurred in the game in the previous period. Each one discounts the future using a discount factor denoted by 6, and 6, for Firm 1 and Firm 2, respectively. Moreover, suppose that both firms use the grim-trigger strategy of cooperating as long as the other firm has cooperated, and playing the Nash equilibrium strategy forever if it has not. d) Derive the smallest value of 6, that makes cooperation in every period an equilibrium choice for Firm 1. e) Derive the smallest value of 6, that makes cooperation in every period an equilibrium choice for Firm 2. f) Explain any difference in your answer to parts d) and e)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

More Books

Students also viewed these Economics questions

Question

2. Find five metaphors for communication.

Answered: 1 week ago