3) of 893 Ford\'s Strategies Rebate No Rebate Rebate $100 -$200 $95 $300 Chevy\'

Question

3) of 893 Ford's Strategies Rebate No Rebate Rebate $100 -$200 $95 $300 Chevy's Strategies $300 $250 Rebate -$120 $250 Ford Motor Co. and General Motors must decide whether or not to offer rebates to purchasers of the Ford Fusion and Chevrolet Malibu, respectively. The payoff matrix above represents the weekly profit ($1,000s) available to the firms under the different rebate strategies. a. What is the dominant strategy for Ford? b. What is the dominant strategy for Chevy? c. Which quadrant represents the equilibrium that will result if both firms act independently and compete with one another? What is the name of this equilibrium? d. Which quadrant represents the equilibrium that will result if the two firms successfully collude? If the two firms collude, what is Ford's incentive to cheat on the collusive agreement? Page 4 6

Explanation / Answer

a) Rebate is the dominant strategy for Ford. Note that when Chevy opts for rebate, Ford earns a higher profit when it opts for rebate (100 vs -200) and similarly, when Chevy opts for no rebate, Ford earns a higher profit when it also opts for no rebate (300 vs 250)

b) Rebate is the dominant strategy for Chevy. Note that when Ford opts for rebate, Chevy earns a higher profit when it opts for rebate (90 vs -120) and similarly, when Ford opts for no rebate, Chevy earns a higher profit when it also opts for no rebate (300 vs 250)

c) Rebate Rebate because both have dominant strategy in choosing Rebate for whatever strategy chosen by the rival. Such equilbrium is called Cournot equilibrium

d) No Rebate No rebate because then they communicate and find that they can earn more profit if they collude. This is called collusive equilibrium.

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