Answer to Question #96854 in Microeconomics for ABU

Question

a) Consider the following payoff matrix of player 1 and player 2

Production Launching Game

PLAYER 2
PRODUCT A PRODUCT B PRODUCT C
PRODUCT D 3, 6 7,1 10,4
PLAYER 1 PRODUCT E 5,1 8,2 14,7
PRODUCT F 6,0 6,2 8,5


Using iterative elimination of dominated strategies approach, we can find the equilibrium of the game
(6Marks).

Answer 1

Start with player one:

If player two chooses product A, player one should choose product B (7,1 versusv3,6).

If player two chooses product C, player one should also choose product C (10,4 versus 14,7).

Therefore, the optimal strategy is to always choose product C (for both players), this means that (product C, product C) is the only iterative elimination.

If this game is played multiple times, then we start at the end (the third playing of the game). At the last stage, this is like a one shot game (there is no future). Therefore, on the last day, the dominant strategy is for both players to choose Product C.