Question

Adidas $ 40m $ 50m 840m Agreement keep prices high a) adidas "dominant strategy? W, Nikes dominant strategy? $20 m $ 50m 120m Nike a dominant, strategy equilibrium? d) prisomis dilemma explain.

Answer 1

As the strategies are not named in the given picture:

Let us name Nike's strategies as 'Up' and 'Down' and Adidas's strategies as 'Left' and 'Right'

a) Adidas sees that playing Right benefits him irrespective of what Nike plays. Hence this makes Right a dominant strategy for Adidas.

b) Nike sees that playing Down benefits him irrespective of what Adidas plays. Hence this makes Down a dominant strategy for Nike.

c) (20,20) or (Down,RIght) is the dominant strategy equilibrium.

d) This resembles Prisoner's Dilemma as the Nash Equilbrium/dominant strategy equilibrium is different from the Pareto efficient equilibrium or the socially optimal output. Both Nike and Adidas can benefit by playing Up and Left respectively. But they don't do so as that strategy profile is not a Nash equilbrium. This is exactly how Prisoner's dilemma works.