Suppose that Ford and GM are considering enter in the market for automobiles bas

Question

Suppose that Ford and GM are considering enter in the market for automobiles based on hydrogen fuel cell (new power technology) and there are no other companies that can compete with them. If Ford is the only one lo develop such a car. It would earn millon in annual profits. In the case when both companies decide to enter, GM's annual profit will be 550 millon while Ford would have to face losses amounting to $200 million annually, Naturally, if a firm stays out of the fuel cell car market, it earns nothing. Prevent the situation described above as a game by filling out the matrix below. In each cell, Write two companies' payoffs, listing Ford's payoffs first. Does any of the two firms have a dominant strategy? If so, state what they are. Ford-. GM- What is the most likely outcome of the game presented above? Explain why.

Explanation / Answer

In this problem, two motor companies are involved in a game. They are Ford and General Motors (GM). They are trying to introduce a new technology Two strategies are enter and not to enter.First payoff of a cell is related with Ford. Second one is for GM.

Thus payoff matrix is-

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Now consider Dominant. A strategy will dominate other strategy, if it provides always better payoff irrespective of the straegy adopted by its rival. First consider Ford. If it enter the market, then its pay off is [50,600]. If it not enter the market then payoff is [0,0]. Thus Ford is always getting higher payoff if it enters the market. Hence dominant strategy of Ford is to enter the market.

Next consider GM. If it enters the market then payoffs are [-200,500]. If it does not enter, then payoff is [0,0]. Note that 0 is better than -200. But 500 is better than 0. So no strategy is dominating here.

Answer:

Ford: Enter strategy domiates not enter strategy

GM: No strategy dominates other.

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As Ford has dominant strategy, it will always enter the market. So GM has to decide which one is better for it when Ford has entered. It is not to enter. Note that not to enter will mean zero payoff to GM. But entering the market will mean a loss of 200.

So most likely payoff from this game is [600,0]

GM Enter Not enter Ford Enter 50,-200 600,0 Not enter 0,500 0,0

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