QUESTION

Consider a strategic interaction between two tech companies: Orange and Airsoft. Both of them have to decide whether to invest in two competing nascent robot technologies: I-bot or N-bot.

If both invest in I-bot, Orange gets 40 and Airsoft gets 100.

If both invest in N-bot, then Orange gets 40 and Airsoft gets 70.

If Orange invests in I-bot and Airsoft invests in N-bot, Orange gets 90 and Airsoft gets 60.

If Orange invests in N-bot and Airsoft invests in I-bot then their payoffs ae 50 and 60 respectively.

You have been hired by the CEO of Orange to provide her with all the alternative options with regards to this interaction, including her best strategic response.

(a)Represent this game in its normal form (played simultaneously), clearly labelling the

players, their strategies and pay-offs.

(b)Verify that that there is no pure strategy Nash Equilibrium in this game.

(c)What is the maximum profit each company can guarantee from playing each of their pure strategies?

(d)Find the mixed strategy Nash Equilibrium in this game and interpret each player's equilibrium strategy.

(e)Outline how the CEOs of each company would operationalise this mixed strategy in order for it to be successful?

(f)Given that both players are playing according to their mixed strategies, what is their expected profit? Are the expected profits higher than the maximum guaranteed profits reported in part (c)?