Consider the car industry, in which Ford and GM are the two dominant firms. (To keep...
- Consider the car industry, in which Ford and GM are the two
dominant firms. (To keep the analysis simple, just forget about all
the others.) The market size is $9 billion. Each firm can choose
whether to advertise. Advertising costs $1 billion for each firm
that chooses it. If one firm advertises and the other doesn't, then
the former captures the whole market. If both firms advertise, they
split the market 50:50 and pay for the advertising. If neither
advertises, they split the market 50:50 but without the expense of
advertising.
- Write the payoff matrix for this game, and find the equilibrium when the two firms moves simultaneously.
- Write the game tree for this game (assume that it is played sequentially), with Ford moving first and GM following.
- Is either equilibrium in parts (a) and (b) better from the perspective of Ford and GM? How could the two firms do better?
Homework Answers
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Suppose there are two firms competing in the market for
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some time and has name recognition, while the second firm, Bitey
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