Suppose Ford and Honda are considering making electric powered cars. Their payof

Question

Suppose Ford and Honda are considering making electric powered cars. Their payoffs are in the table below and follow the same pattern as the previous problem.

A. If Ford and Honda make their decision at the same time what do both firms do?

B. Would your answer change if the US Government provided Ford with a $55 million dollar incentive payment to produce electric cars. Does this new information affect the outcome from part A?

Ford Enter Do Not Enter Enter -40 0 Honda 10 250 Do Not Enter 200 0 0 0

Explanation / Answer

It is a problem on game theory. Two car manufacturing firm Honda and Ford are involved. They wants to decide on entering into the production of electric car. They are taking decisions at the same time. Their objective is to maximize pay off.

First consider Honda.

1. Suppose it has decided to enter into the market. If rival also enter, then Honda will loss -40. If rival does not enter then Honda will not gain anythig. Thus whatever action its rival is taking that will not make the payoff positive.

2. If it does not enter, then it may get a positive payoff of 200 if rival has entered the market. Otherwise its pay off is zero.

Thus Honda will get equal or better return, if it does not enter in the market. It is a dominating strategy for this firm.

Next coonsider the case of Ford.

1. If it has decided to enter, then it will earn 10 if rival also enter. If rival does not enter then Ford will not get any pay off.

2. If it does not enter, then it will earn 250 if rival enter the market. Otherwise pay off is zero.

Thus not entering the strategy is dominating strategy of Ford.

Therefore when both firm are taking decision at the same time, then both of them will go for not entering in the electric car market.

However Ford can gain if Honda enter the market. In that case Honda will not better off but Ford will be better off.

Simlarly if Ford enter the market, then its payoff will not improve but Honda will be better off.

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Answer B:

Here you have to assume that US Government has decided to provide Ford $55 million incentive if it produce electric car. In that case pay off of Ford will be-

a. If Hondaalso enter: $10+$55=$65

b. If Honda does not enter: $55.

Here NE strategy is no more dominating one for Ford. But it is still a dominating strategy for Honda. so Honda will not enter the market. But Ford will enter the market. It will be optimum equilibrium strategy. Nash equilibrium is found. Honda will have 200 pay off and Ford will get 55 pay off.

Answer: optimum strategy 'NE' for Honda, 'E' for Ford with pay off 200 for Honda and 55 for Ford

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