Question 3

Two firms, A and B, are contemplating exporting a local fruit called durian to another country that has strong demand for durian. If both firms export their durians, each firm can earn an export revenue of $25 million. If both firms do not export, each firm can earn a revenue of $12 million from their own domestic market. If one of them exports durians and the other does not export, the firm that exports durians can earn an export revenue of $50 million. But the non-exporting firm will earn a revenue of $18 million.

(a) If both firms make a decision simultaneously, construct and analyse a payoff matrix and solve for the Nash equilibrium. Explain whether this is the prisoner's dilemma game.

(13 marks)

(b) Suppose Firm A can make a decision before Firm B. Construct and analyse a decision tree model and determine the payoffs to both firms. Does timing matter in this game?

(12 marks)