A supplier and a buyer, who are both risk neutral, play the following game. 1. t

Question

                    A supplier and a buyer, who are both risk neutral, play the following game.                 

                

                    1. the buyer orders a good of quality q>=0 from the supplier and promises to pay s>=0.                 

                

                    2. The supplier decides which quality q'>=0 to deliver.                 

                

                    3. The buyer observes q' and decides how much to pay (s'>=0) for the delivered quality                 

                

                    
                

                

                    The buyer's payoff is q'-s', and the supplier's payoff is s'-C(q'), where C() is a strictly convex function with C(0)=C'(0)=0. These payoffs are commonly                     known.                 

                

                    
                

                                     What is the subgame perfect equilibrium of this game?

Explanation / Answer

A perfect equilibrium will be when the q=q' and thus s=s'.

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