Question

Two drug companies, Company A and Company B, produce drugs in the same field of medicine. Each can choose to spend little or a lot on research. If only one spends more, it will produce better drugs more often and will make large profits. However, if both spend more, the result is that each makes the other's drug obsolete more quickly, with less profits for both. The following shows their payoff matrix.

	Drug company A's choices
		Spend little	Spend a lot
Drug company B's choices	Spend little	A gets 200	A gets 300
		B gets 200	B gets 50
	Spend a lot	A gets 50	A gets 100
		B gets 300	B gets 100

a) What will be the result if they collude?

b) What will be the result with a maximum strategy?

c) What will happen if this game is played over and over?

Answer 1

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