Question

Two equally sized companies, Auburn Motorcar Company and Cord Automobile Corporation, dominate the domestic automobile market. Each company can produce 500 or 750 midsized automobiles a month. This static game is depicted in the following figure. All payoffs are in millions of dollars.

a. Does either firm have a dominant strategy?

b. What is the Nash equilibrium strategy profile if this game is played just once?

c. What strategy profile results in the best payoff for both players?

d. Is cooperation a Nash equilibrium if this game is played seven times?

		Cord
		750 cars	500 cars
Auburn	750 cars	(5, 5)	(3, 6)
	500 cars	(6, 3)	(4, 4)

Payoffs: (Auburn, Cord)

Answer 1

a)

The only Auburn the dominant stratgy:

Auburn has the 500 Cars as the dominant strategy: (6,4) > (5,3)

b)

If the Auburn goes with the dominant strategy, the Cord will also go with strategy 500 Cars.

Thus, Nash Equilibrium: ( 500 Cars: 500 Cars)

c)

The both players selecting the strategies 700 Cars would maximize the profits of each player. The each player will be getting the 5.

d)

the cooperation can not be elicited if the game is played for limited period of time. The cooperation is possible if the game is played infinitely.