Question

Draw a two firm game theory matrix in which each firm has the choice of offering a discount or not offering a discount. In the matrix make up numbers for each firm’s profits so that there is a dominant outcome in which both firms offer the discount even though both firms would be better off if they did not offer the discount.

Answer 1

For Firm 1

If 2 chooses discount- 1 chooses discount because it has the better payoff of 5

If 2 chooses not to discount, 1 will choose discount because it has better pay off of 10

Because in both cases 1 is choosing discount the dominant strategy is to discount.

For Firm 2

If 1 chooses to discount, 2 chooses discount because it has better pay off of 5

If 1 chooses not to discount, 2 will choose discount because it has better payoff of 10

Because in both cases firm 2 is choosing discount, dominant Strategy is discount.

Because the Nash is (Discount, Discount) the asked criteria is satisfied because though you get (5,5) as Nash, (8,8) is still a better alternative or both firms will be better off not discount

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