Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please help me to solve this problem Glassworks and Clearsmooth compete in the local market for windshield repairs. The market size (total available profits) is

Please help me to solve this problem

Glassworks and Clearsmooth compete in the local market for windshield repairs. The market size (total available profits) is $10 millions per year. Each firm can choose whether to advertise on local television. If a firm chooses to advertise in a given year, it costs that firm $3 million. If one firm advertises and the other doesn't, then the former captures the whole market. If both firms advertise, they split the market 50:50. If both firms choose not to advertise, they also split the market 50:50.

(a)Suppose the windshield-repair firms know they will compete for just one year. Draw the payoff matrix for this game. Find the Nash equilibrium strategies.

(b)Suppose the firms play this game for five years in a row, and they know that at the end of five years, both firms plan to go out of business. What is the subgame-perfect equilibrium for this five-period game? Explain.

(c)What would be a tit-for-tat strategy in the game described in part (b)

(d)Suppose the firms play this game repeatedly forever and suppose that future profits are discounted with an interest rate of 20% per year. Can you find a subgame-perfect equilibrium that involves higher annual payoffs than the equilibrium in part (b)? If so, explain what strategies are involved. If not, explain why not.

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

China's Air Pollution Problems

Authors: Claudio O Delang

1st Edition

1317209281, 9781317209287

More Books

Students also viewed these Economics questions

Question

2. The purpose of the acquisition of the information.

Answered: 1 week ago

Question

1. What is the meaning of the information we are collecting?

Answered: 1 week ago

Question

3. How much information do we need to collect?

Answered: 1 week ago