Managerial Economics and Strategy, 2/e

Chapter 13

1. 1.1 (a) In the simultaneous move game there are two Nash equilibria (in pure strategies). One Nash equilibrium is for Firm 1 to sell 10 and Firm 2 to sell 20. The other is for Firm 1 to sell 20 while Firm 2 sells 10. (b) After drawing the game tree, you can use backward induction to see that if Firm 1 sells 10, then Firm 2 will choose 20, while if Firm 1 sells 20, then Firm 1 will sell 10. The first of these possibilities is better for Firm 1. Since Firm 1, the leader, can choose first, it therefore sells 10. Thus, the subgame-perfect Nash equilibrium is for Firm 1 to sell 10 and Firm 2 to sell 20. (c) If Firm 2 is the leader, the subgame-perfect Nash equilibrium is that Firm 2 sells 10 and Firm 1 sells 20.

2. 1.2 In a game that is ...