Question

Retailer A and retailer B are considering entering the same market. They can choose to enter the market by establishing an online channel or by operating a physical store. Their payoff matrix is given as follows.

Retailer B

  Online Channel Physical Store

Retailer A Online Channel   (100, 80) (120, 100)

  Physical Store (80, 100)   (140, 150)

a. Find out retailer A’s best response to retailer B’s strategy

. b. Find the Nash equilibrium.

Answer 1

a. Given that retailer B choose online channel, reatiler A's best response is online channel (100 > 80).
Given that retailer B choose physical store, reatiler A's best response is physical store (140 > 120).

b. Given that retailer A choose online channel, reatiler A's best response is physical store (100 > 80).
Given that retailer A choose physical store, reatiler A's best response is physical store (150 > 100).
So, the NE is (Physical store, Physical store) = (140, 150) as best response of both retailers occur simultaneously when they choose physical store.