Question

8. Collusive outcome versus Nash equilibrium 

Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning. 

If neither restaurant cleans, each will earn $14,000; alternatively, if they both hire workers to clean, each will earn only $11,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $18,000, and the other restaurant will make only $6,000. 

Complete the following payoff matrix using the information just given. (Note: All-You-Can-Eat Café and GoodGrub Diner are both profit-maximizing firms.) 

Answer 1

Good Grub Clean Up Doesn't clean Clean Up |(11,000, 11,000) Doesn't clean (6,000),(18,000) |(18,000, 6,000) (14,000),(14,000) All you can eat

a) All you can eat and good grub collide then both the firms will not clean and they both will be making an outcome of 14,000 each.

b) If both the restaurants cheat and behave uncooperatively then the outcome will be 11,000 each as both of them will clean. good grub 11,000 and all you can eat 11,000.