Answer to Question #72185 in Economics for Hana Alemayehu

Question

Suppose there are two firms (f1and f2) producing identical product competing for market share and each of which like to dominate the other, if possible. They each faced a choice between Defending and cooperating. When either defends or both cooperate, neither is able to dominate the other. Assume these preferences are reflected in their profit pay offs. If both the player’s choice to defend, their profit will be150 each. when one firm defends and the other cooperates their profit level will be 500 and 0 respectively. similarly, when both cooperate they end up with profit level of 300 each. with this in mind:
a. Represent the above game in payoff matrix form.
b. Identify the dominant strategy for both firms and the dominant strategy equilibrium?

Answer 1

a. Payoff matrix is:

f1\f2 defending cooperating
defending 150\150 500\0
cooperating 0\500 300\300
b. The dominant strategy for both firms is defending and the dominant strategy equilibrium is 150\150.