We can think of U.S. and Japanese trade policies as a prisoners€™ dilemma. The two countries are considering policies to open or close their import markets. The payoff matrix is shown below.

a. Assume that each country knows the payoff matrix and believes that the other country will act in its own interest. Does either country have a dominant strategy? What will be the equilibrium policies if each country acts rationally to maximize its welfare?
b. Now assume that Japan is not certain that the United States will behave rationally. In particular, Japan is concerned that U.S. politicians may want to penalize Japan even if that does not maximize U.S. welfare. How might this concern affect Japan€™s choice of strategy? How might this change the equilibrium?

Transcribed Image Text:

Japan Open 10, 10 -100, 5 Close 5, 5 1, 1 Open U.S Close