Question

8. Collusive outcome versus Nash equilibrium

Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning.

If neither restaurant cleans, each will earn $13,000; alternatively, if they both hire workers to clean, each will earn only $8,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $17,000, and the other restaurant will make only $3,000.

Complete the following payoff matrix using the information just given. (Note: All-You-Can-Eat Café and GoodGrub Diner are both profit-maximizing firms.)

		GoodGrub Diner
		Cleans Up	Doesn't Clean Up
All-You-Can-Eat Café	Cleans Up	,	,
	Doesn't Clean Up	,	,

If All-You-Can-Eat Café and GoodGrub Diner decide to collude, the outcome of this game is as follows: All-You-Can-Eat Café   and GoodGrub Diner   .

If both restaurants decide to cheat and behave noncooperatively, the outcome reflecting the unique Nash equilibrium of this game is as follows: All-You-Can-Eat Café   , and GoodGrub Diner   .

Answer 1

	GoodGrub diner: Cleans Up	Doesn't Clean Up
All-You-Can-Eat Café: Cleans Up	$8,000; $8,000	$17,000; $3,000
Doesn't Clean Up	$3,000; $17,000	$13,000; $13,000

If they collude:
All-You-Can-Eat Café doesn't clean up and GoodGrub Diner doesn't clean up.
(Because their joint profit is maximum.)

If both restaurants decide to cheat and behave noncooperatively,
All-You-Can-Eat Café cleans up and GoodGrub Diner cleans up.
(Their best response occur simultaneously when they cleans up. So, this is the outcome when they behave noncooperatively.)