Suppose Toyota and Honda must decide whether to make a new breed of side-impact

Question

Suppose Toyota and Honda must decide whether to make a new breed of side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile by $1,000. If both firms make side-impact airbags standard equipment, each company will earn profits of $1 billion. If neither company adopts the side-impact airbag technology, each company will earn $2.5 billion. If one company adopts the technology as standard equipment and the other does not, the adopting company will earn a profit of $3 billion and the other company will earn $-1.5 billion.

If you were a decision maker at Honda, would you make side-impact airbags standard equipment?

Yes.

No.

There is not enough information to answer the question.

If Toyota and Honda were able to cooperate, would you expect this same outcome?

Yes

No

There is not enough information to answer the question.

Explanation / Answer

The following is the payoff matrix (all values are in $ bn)

Dominant strategy of each of these firms is to make the side impact airbags (it earns them a higher profit, no matter what decision the other firm takes)

Yes- Honda would make side-impact airbags.

No - If Toyota and Honda were able to cooperate, they would want to maximize the total profits and the outcome would be that neither would make side-impact airbags. (Both would make a profit of $2.5 bn each)

Toyota Make Don't make Honda Make 1,1 3,-1.5 Don't make -1.5,3 2.5,2.5

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