Suppose Samsung and Vizio can collaborate on the production of LED TV's. Samsung produces all the parts and Vizio assembles. If both firms exert optimal effort, the probability is 0.25 that they will generate a revenue of $600 million, which they will split equally. A sub-optimal level of effort from one firm reduces the probability of achieving a revenue of $600 million to 0.15, whereas if both firms shirk, the probably is reduced to only 0.10. Assume that optimal effort costs $35 million, whereas shirking costs $0.

If monetary amounts represent payoffs, Analyze the Nash Equilibrium and solve the incentive problem, assuming they both spend $20 million on an observer to ensures that shirkers pay a $30 million penalty to the non-shirker.