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The only two firms moving crude oil from an oil-producing region to a port in Atlantis are pipelines: Starline and Pipetran. The following table shows the annual profit (in millions of euros) that each firm would earn at different capacities. Starlines profit is the left number in each cell; Pipetrans profit is the right number. At the current capacities (with no expansion) Starline is earning 40 million euros, and Pipetran is earning 18 million euros annually. Each company is considering an expansion of its capacity. Since Pipetran is a fairly small company, it can consider only a small expansion to its capacity. Starline has the ability to consider both a small and a large expansion.

a) If the two firms make their decisions about expansion simultaneously, is there a unique Nash equilibrium? If so, what is it? If not, why not? Explain whether this game is an example of a prisoners dilemma.

b) Would Starline have a first-mover advantage if capacities were chosen sequentially? If so, briefly explain how it might credibly implement this strategy.

c) Suppose you were hired to advise Pipetran about its choice of capacity. If Pipetran has the option of moving first, should it do so? Explain.

3. Why might cooperation emerge from a repeated game even though the single shot game yields non-cooperation as the dominant strategy?

4. Why do strategic moves affect the outcome of a one-shot sequential game, but not a one-shot simultaneous game? Does this change if the games change from one-shot to repeated?

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