![]() But, in this model, it can’t do that because it know if A enters, it will have to enter or face the costs of -3. Firm B would prefer both firms to leave the market so it can get to zero. If a firm enters or leaves, there is always a net benefit of zero.įor firm A, its dominant strategy is to enter the market, because 1 is greater than -2.įor firm B, its dominant strategy is also to enter the market because -1 is greater than -3. In this situation, we have another zero-sum game situation. For everyone who gains, there is an equal and opposite loss. This is an example of a zero-sum game – the net benefit is always zero.If the pennies are mixed (heads/tails) or tails/heads then play B wins both pennies.If the pennies are Heads/heads or tails/tails – then Player A wins both pennies.But, in the real world, for various reasons, co-operation may not be there. The issue with this game theory dillema is that there are strong rewards from co-operating.It may not be able to afford this outcome. However, the key thing is whether one firm is willing to take the plunge and make zero profits in the short-run.In this case, the firm will probably start investing too, as they would be better off. However, if one firm invests in new technology and the other doesn’t, then they will be left with $0 (it is not widely shared).However, if they both invest in new technology, which will become new market standard, they will both get substantially better pay off (a) with $200 each. ![]() In this example, if neither firms invest, they will make $50 each.Therefore, there is strong incentive to avoid price war. Therefore, the firm who loses out will almost certainly retaliate and the outcome will move to (d) with both firms just making $3 profit. However, the other firm who keeps prices high will lose market share and get zero profits. However, when prices are stable, if one firm cuts prices (starts price war) it will see profits rise to $60. The best outcome for both firms is (a) $40, $40. This is a similar outcome but for two firms that can keep prices high and stable or start a price war. Both players could gain from co-operation. A Nash equilibrium is not necessarily pareto efficient. Nash equilibrium – where each player has nothing to gain by changing strategy, given the choices of the other player.Dominant strategy – when one choice gives better result than other.What the opponent does also depends upon what he thinks the first player will do. Game study is the study of strategic interaction where one player’s decision depends on what the other player does.
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