The market for retail gasoline has two leaders who must choose whether or not to include an additive in their

gasoline. Including the additive creates a perception of product differentiation, which increases profits, but

comes at a cost. Not including the additive means the products remain undifferentiated but comes at no cost.

If only one firm includes the additive, they will get the majority market shar rather than just 50%, and earn

higher profits despite the additional cost.

The payoffs are as follows: of both firms include the additive, they earn $2 in profit per gallon. If neither firm

includes the additive they both earn $3 in profit per gallon. If one firm choses to include the additive and one

does not, the firm with the additive will earn $4 while the firm without the additive will only earn $1 in profit

per gallon.

a. Set up the normal form static game described above.

b. Determine if either firm has a dominant strategy, and if so, identify it.

c. Solve for the equilibrium. Is it a Nash equilibrium or a mixed-strategy equilibrium?

d. What do we call this type of game?