Question

Scenario 10

Two rival firms in duopoly (a market in which there are only two firms that compete) are considering spending on the Research and Development (R&D). Each firm can spend either $20 million or nothing on R&D:

• If neither firm spends, Firm A earns $35 million and Firm B earns $75 million.
• If Firm A spends on R&D and Firm B doesn’t, Firm A earns an economic profit of $85 million and Firm B make an economic loss of 5 million.
• If Firm B spends on R&D and Firm A doesn’t, Firm B earns an economic profit of $85 million and Firm A make an economic loss of 5 million.
• If each firm spends on R&D, Firm A earns $15 million and Firm B earns $55 million.

Refer to Scenario 10.

(1) Is there a dominant strategy for Firm A? Explain.

(2) Is there a dominant strategy for Firm B? Explain.

show your work

Answer 1

Answer : Based on given scenario the payoff matrix box become as follows :

Firm B

   Spend Doesn't spend

Firm A's Spend. (15, 55) (85, -5)

Firm A's Doesn't spend  (-5, 85) (35, 75)

1) Now from above payoff matrix box we can see that Firm A has a dominant strategy. For Firm A the dominant strategy is Spend. Because for Firm A the payoffs of Spend strategy are higher than the other strategy payoffs.

2) From above payoff matrix box we can see that Firm B has a dominant strategy. For Firm B the dominant strategy is Spend. Because for Firm B the payoffs of Spend strategy are higher than other strategy payoffs.