2. Two large producers of mass transit vehicles are preparing to adopt a new eng
ID: 1196185 • Letter: 2
Question
2. Two large producers of mass transit vehicles are preparing to adopt a new engine technology for their latest vehicles. P1 is propane technology and P2 is an electric/gasoline hybrid. Either is just as attractive to customers and equally costly to build. However, due to economies in repair and obtaining replacement parts, there are benefits of having the same technology. The payoff matrix for adoption of technology is below.
Firm #2
P1 P2
P1 P1=1.5, P2=1.5 P1=.75, P2=.75
Firm #1 P2 P1=.75, P2=.75 P1=1.5, P2=1.5
What is the equilibrium of this game?
3. (number 2 continued) Suppose this is now the payoff matrix.
Firm #2
P1 P2
P1 P1=2.5, P2=1 P1=.75, P2=.75
Firm #1 P2 P1=.5, P2=.5 P1=1, P2=2
(a) What is the simultaneous move equilibrium?
(b) Can firm #1 gain an advantage by committing to move first? Show as a sequential game.
Explanation / Answer
2.
When Firm 1 chooses P1, Firm 2 chooses P1
When Firm 1 chooses P2, Firm 2 chooses P2
When Firm 2 chooses P1, Firm 1 chooses P1
When Firm 2 chooses P2, Firm 1 chooses P2
Thus, there are 2 Nash equilibria: (P1,P1) and (P2,P2)
3.
When Firm 1 chooses P1, Firm 2 chooses P1
When Firm 1 chooses P2, Firm 2 chooses P2
When Firm 2 chooses P1, Firm 1 chooses P1
When Firm 2 chooses P2, Firm 1 chooses P2
Thus, there are 2 Nash equilibria: (P1,P1) and (P2,P2)
No, the equilibrium will be the same.
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