Question

Coke and Pepsi are in the following strategic interaction – both firms much choose to either introduce a New product, or Not. Both firms make their choices simultaneously. The payoffs are (20, 30) to Pepsi and Coke, respectively, if they both opt for New. If Coke goes New and Pepsi Not, the payoffs are 60 to Coke and 10 to Pepsi. If Coke opts for Not and Pepsi New, the payoffs are 10 to Coke and 60 to Pepsi. Finally, if they both choose Not the payoffs are 50 each. What is the Nash equilibrium?

a) (New; New), for Coke and Pepsi respectively.

b) (Not, Not)

c) (Not, New)

d) (New, Not)

e) None of the above

Answer 1

Answer. Option a) is correct i.e. (New, New), for Coke and Pepsi respectively

From the given information, following game matrix is prepared

		Pepsi
		New Product	Not
Coke	New Product	30,20	60,10
	Not	10,60	50,50

If coke opts New Product then Pepsi will choose New Product [30,20]

If coke opts Not then Pepsi will choose New Product [10,60]

Similarly,

If Pepsi opts New product then Coke will choose New Product [30,20]

If Pepsi opts Not then Coke will choose New Product [60,10]

Since Coke and Pepsi strategies match at [New Product, New Product] i.e. [30,20]