4) Two firms are competing in an oligopolistic industry. Firm 1, the larger of t

Question

4) Two firms are competing in an oligopolistic industry. Firm 1, the larger of the two firms, is contemplating its capacity strategy, which could be either "aggressive" or "passive." The aggressive strategy involves a large increase in capacity aimed at increasing the firm's market share, while the passive strategy involves no change in the firm's capacity. Firm 2, the smaller competitor, is also pondering its capacity expansion strategy; it will also choose between an aggressive strategy and a passive strategy. The following table shows the profits associated with each pair of choices: Firm 2 Aggressive Passive 33, 10 36, 12 Firm Passive Aggressive25,9 a) If both firms decide their strategies simultaneously, what is the Nash equilibrium? b) If Firm 1 could move first and credibly commit to its capacity expansion strategy, what is it:s optimal strategy? What will Firm 2 do?

Explanation / Answer

a) Nash equillibrium:

Firm 1 - Passive strategy (Dominant strategy of this firm , earns a higher payoff no matter what decision firm 2 makes)

Firm 2 - Aggressive strategy (Earns a higher payoff given firm 1's dominant strategy)

b) Optimal strategy would remain the same for firm 1, it would use a passive strategy which is also its dominant strategy. Firm 2 would reply with an aggressive strategy to maximize its payoff.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.