Two firms are in the chocolate market. Each can choose to go for the high end of the market (high quality) or the low end (low quality).

Resulting profits are given by the following table:

Firm 1 / Firm 2 Low High

Low -20,-30 900,600

High 100,800 50,50

a.Consider the simultaneous game where Firm 1 (the row player) and Firm 2 (the column player) decide on the quality at the same time. Using the Method 1 (the intersection of best responses), find out the Nash equilibria, if any.

b.Draw a game tree representing this simultaneous game given in section a.

c.Next consider a variation of this game. Suppose Firm 1 is the leader, he decides first on the quality. Then, the Firm 2 decides on the quality knowing the decision of Firm1. Draw the game three of this sequential game. Find the Subgame Perfect Nash Equilibrium of this game by backward induction method.

d.Draw a table representing this sequential game given in section c.