Question

Consider the following simultaneous-move, one-shot game facing two firms (Firm I and Firm II), with the payoffs given in Table1. The firms are not able to coordinate or communicate. Each firm has three strategic options (options A, B and C for Firm I and D, E and F for Firm II).

Table 1

		Firm II
Firm I	Strategy	D	E	F
	A	100, 125	300, 250	200, 260
	B	250, 0	350, 300	340, 400
	C	0, -100	400, 300	-100, 350

(a). For each firm, identify the dominant strategy if it exists. Using the principle of dominant strategy, identify each firm’s best strategy and the outcome.

(b). What outcome would be achieved if the firms could coordinate? Briefly explain

Answer 1

A ) There is no dominant strategy for firm 1 and for firm 2 choosing  "E" is the dominant strategy . So for firm 1 choosing "C" is the best strategy given that firm 2 will choose " E " and outcome is ( 400 , 300 )

B ) If the firm could coordinate the outcome achieved will be ( 400 , 300 ) because in that scenario firm 1 is getting maximum payoff given what firm 2 is doing . Choosing " E " is the dominant strategy for firm 2 and players do not deviate from their dominant strategy , so its best for firm 1 to coordinate with firm 2 and choose " C ".