Question

Think of this example as similar to the Prisoner's Dilemma, and complete the following table with the total profit (revenue minus costs) for both firms based on the decisions of both A and B.

		Practice B
		Purchase	Doesn't purchase
Practice A	Purchase	scenario 1	scenario 2
	Doesn't purchase	scenario 3	scenario 4

In scenario 1, each firm will incur the full cost of the equipment, and they split the new business. The total profit, considering both companies, is Blank 1.

In scenario 2, one firm incurs the full cost of the equipment and gets all the new business; the other firm loses customers to the business with new technology. The total profit, considering both companies, is Blank 2.

In scenario 3, one firm incurs the full cost of the equipment and gets all the new business; the other firm loses customers to the business with new technology. The total profit, considering both companies, is Blank 3.

In scenario 4, neither company incurs new costs, so there is no new business. The total profit, considering both companies, is Blank 4.

Assuming the practices make decisions independently, which scenario happens in this market?

1. 		Insufficient information
   		Scenario 3
   		Scenario 2
   		Scenario 4
   		Scenario 1

Answer 1

"D"

Scenario 1 will be the Nash equilibrium as to increase the profit in the market both the firm will acquire the machinery and split the profit, the one not acquiring it will be loosing.