3. Collusive outcome versus Nash equilibrium Consider a remote town in which two

Question

3. Collusive outcome versus Nash equilibrium Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning If neither restaurant cleans, each will earn $13,000; alternatively, if they both hire workers to clean, each will earn only $10,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $18,000, and the other restaurant will make only $6,000. Complete the following payoff matrix using the information just given. (Note: All-You-Can-Eat Café and GoodGrub Diner are both profit-maximizing firms.) GoodGrub Diner Cleans Up Doesn't Clean Up Cleans Up All-You-Can-Eat Café Doesn't Clean Up and If All-You-Can-Eat Café and GoodGrub Diner decide to collude, the outcome of this game is as follows: All-You-Can-Eat Café GoodGrub Diner

Explanation / Answer

If All You Can Eat Cafe and GoodGrub diner decide to collude, the outcome of this game is as follows: All You Can Eat Cafe doesn't clean up and GoodGrub Diner also doesn't clean up. (Both earn a payoff of $13000)

If both restaurants behave noncooperatively, the outcome reflecting the unique Nash equillibrium of this game is as follows: All You Can Eat Cafe cleans up and GoodGrub Diner also cleans up. (Both earn a payoff of $10000, this is the dominant strategy of both restaurants as no matter what decision the other takes, payoff would be better on choosing this strategy)

GoodGrub Diner Cleans Up Doesn’t Clean Up All You Can Eat Café Cleans Up $10000, $10000 $18000, $6000 Doesn’t Clean Up $6000, $18000 $13000, $13000

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