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

Question

7. 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 kilometres 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/table using the previous information. (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 If All-You-Can-Eat Café and GoodGrub Diner decide to collude is game is as follows: All-You-Can-Eat Café and GoodGrub Diner does not clean leans If both restaurants decide to cheat and behave noncooperativ eflecting the unique Nash equilibrium of this game is as follows: All- You-Can-Eat Café , and 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 does not clean and GoodGrub Diner does not clean. (Total Profits are maximized)

If both restaurants decide to cheat and behave noncooperatively, the unique Nash equilibrium of this game is as follows: All You Can Eat Cafe cleans and GoodGrub Diner cleans. (Dominant strategy of both players is to clean up)

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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