Two firms, VolgaBus and GMB, are competing to sell 100 buses to MetroTravel.
Each firm has the option of submitting a low-price bid of $15 000 per bus, or a high-price bid of $20 000 per bus. In the event of a tie, the city will buy 50 buses from each firm.
a. If one firm win the contract with low-price bid, it will receive 100*$15,000 = $1,500,000, another firm will receive $0.
In the event of a tie at low-price bid each firm will receive 50*$15,000 = $750,000.
In the event of a tie at high-price bid each firm will receive 50*$20,000 = $1,000,000.
So, a payoff matrix for this simultaneous game is:
VolgaBus\GMB Low-price bid High-price bid
Low-price bid $750,000\$750,000 $1,500,000\$0
High-price bid $0\$1,500,000 $1,000,000\$1,000,000
b. Based on our matrix from part a., the Nash equilibrium will be a tie at low-price bid, so each firm will receive 50*$15,000 = $750,000, because both firms will choose a low-price strategy to win a contract.