Question

2. Two firms, VolgaBus and GMB, are competing to sell 100 buses to MetroTravel, a cityowned bus company. They each submit a sealed bid to get the contract, with the contract going to the lowest bid. Each firm has the option of submitting a low-price bid of $15 000 per bus, or a high-price bid of $20 000 per bus. In the event of a tie, the city will buy 50 buses from each firm.

a. Draw a payoff matrix for this simultaneous game. (4 marks)

b. Based on your matrix from part a., what will the Nash equilibrium be? Explain in detail how you arrived at your answer. (4 marks)

Answer 1

		Volgabus
		High price bid	Low price bid
GMB	High price bid	(50,50)	(0,100)
	Low price bid	(100,0)	(50,50)

b) If GMB chooses high price bid, Volgabus will choose a low proce bid.

If GMB chooses low price bid, Volgabus will also choose a low price bid.

So, we can see that irrespective of what GMB chooses, Volgabus will always choose a low price bid.

If Volgabus chooses high price bid, GMB will choose a low proce bid.

If Volgabus chooses low price bid, GMB will also choose a low price bid.

So, we can see that irrespective of what Volgabus chooses, GMB will always choose a low price bid.

So the Nash equilibrium is (Low price, Low price) and the payoff will be (50 buses, 50 buses).

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