Question 4 (18 marks)

Suppose that two firms, firm A and firm B, are competing in the market. Assume that each firm has two strategies available: "no promotion" and "extensive promotion". If both firms choose "no promotion", each firm will get a payoff of 8000. If both firms choose "extensive promotion", each firm will get a payoff of 5000. If one firm chooses "no promotion" and the other firm chooses "extensive promotion", the firm that chooses "no promotion" will get a payoff of 4000 and the firm that chooses "extensive promotion" will get a payoff of 10000.

1. Assume the game is a 2-players one-shot simultaneous game, please develop the normal form of this game by showing the players, the strategies and the payoffs. (6 marks)
2. Follow part (a), determine the dominant strategy of firm A. (3 marks)
3. Follow part (a), determine the dominant strategy of firm B. (3 marks)
4. Follow part (a), determine the equilibrium of this game. (3 marks)
5. If the game becomes an infinitely repeated game, what do you expect to happen? (3
6. marks)