6) Suppose the two largest auto manufacturers, Toyota and GM, considering enteri
ID: 1097427 • Letter: 6
Question
6) Suppose the two largest auto manufacturers, Toyota and GM, considering entering a market for electric automobiles and that their profits (in millions of dollars) from entering or staying out of the market are summarized in the following game matrix.
Toyota
GM
Enter
Do not Enter
Enter
A $10 -$40
B $250 $0
Do not enter
C $0 $200
D $0 $0
a. Does each firm have a dominant strategy? If so, identfy what that strategy is. Why?
b. What is the Nash equilibrium, if any? Explain where the Nash equilibrium occurs in the payoff matrix.
Toyota
GM
Enter
Do not Enter
Enter
A $10 -$40
B $250 $0
Do not enter
C $0 $200
D $0 $0
Explanation / Answer
a)
Given that Toyota plays Enter, it is better for GM to play Do not Enter
Given that Toyota plays Do not Enter, it is better for GM to play Enter
So, GM has no dominant strategy.
Given that GM plays Enter, it is better for Toyota to play Enter
Given that GM plays Do not Enter, it is better for Toyota to play Enter
So, Toyota has a dominant strategy to play Enter.
b)
Looking at the strategies above, the only Nash equilibrium comes out to be:
(Enter, Do not Enter), or ($250, $0)
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