Hopefully, you now see that when each player chooses her/his dominant strategy,
ID: 1102873 • Letter: H
Question
Hopefully, you now see that when each player chooses her/his dominant strategy, the result is not so great for every member of the group. The key to avoiding this “prisoner’s dilemma” outcome of lower payoffs for bother players is to find a way for players to credibly commit to the dominant strategy.
A way for this to happen is for the players to form a cartel, a coalition of players (or firms) that coordinate their decisions to reach a more optimal solution for all members of the group by finding a way for the members to credibly commit to their dominate strategies. In the USA, we call this collusion, and it is illegal. Cartels, it should be noted, are not always successful in maintaining their agreements because sometimes there may be an incentive for a member to cheat on the cartel.
Now, let’s pretend there are two companies that produce Type IV throw-able devices for boaters. Both firms must decide whether to produce and market a Premium Type IV or a regular same-old-same-old Type IV. The profit of each firm depends on the type of Type IV produced by the other firm. Please use this payoff table (matrix) to answer the questions that follow the table:
Please note: The values listed first in each box (left to right) are for the firm called Stay Afloat, while the values listed second in each box (left to right) are for the firm called Swim Don’t Sink, Swim!
Don’t Sink, Swim!
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Premium
Regular
Premium
$400 / $100
$450 / $200
Regular
$150 / $400
$200 / $150
Stay Afloat
1. Does Stay Afloat have a dominant strategy?
2. What decision should Stay Afloat make and why should that be the decision?
3. Does Don’t Sink, Swim! have a dominant strategy?
4. What decision should Don’t Sink, Swim! make and why should that be the decision?
5. Is there a Nash Equilibrium, if so, what is it, and if not, why not?
xxxxxxxxxxxxxx
Premium
Regular
Premium
$400 / $100
$450 / $200
Regular
$150 / $400
$200 / $150
Explanation / Answer
1) stay Afloat has dominant strategy as playing premium because dominant strategy are those startegy which a player plays irrespective of what other player plays
2) stay Afloat will play Premium
3)no dominant strategy
4)Dont sink Swim will play Regular if stay Afloat plays Premium and plays premium of Aflaot plays regular
5). (Premium, Regular) is a Nash equilibrium.
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