Q4) Tourists in Hong Kong, an 1 hour ferry ride from Shen Zhen, are demanding the latest espresso drinks from a familiar brand but their small number means demand can only sustain one new coffee shop. You and another popular chain, Starbucks, are considering making the considerable investment necessary to set up a shop in Hong Kong. Analyse the interaction between the two firms using game theory. Present a payoff matrix to model the situation and analyse it for Nash equilibrium. What can you do to make your best outcome more likely?

(What to include in the answer?)

This is a Game Theory Question

Construct pay-off matrix according to the specification of the question

Identify Nash equilibrium

If you still have time/word count, you should go through the working of how to get the Nash equilibrium using "best reply" template given in the lecture note

You can use the Excel file given by your coordinator to help you

Discuss any dominant strategy, prisoner dilemma in your game

If there is prisoner dilemma, discuss the potential of collusion and cheating

Government intervention

Nash equilibrium achieve maximum market efficiency.

Potential of collusion?

Preparation work

Pay-off matrix of prisoner dilemma and chicken out