Question

Please answer all the questions and show work for the first one. Thank you

2. Your firm must decide whether or not to introduce a new product. If you introduce the new product, your rival will have to decide where to copy (clone), the new product or not. If you don't introduce the new product, you and your rival earn $10 million each. If you introduce the new product, and your rival clones it, you will lose $5 million and your rival will earn $20 million. If you introduce the new product and your rival does not clone it, you make $5 and your rival makes so the appropriate questions below. 10 points]. . Answer This is a sequential game and you should do the following: a. Draw this game. b. Identify the Nash equilibria. c. Is there a sub game perfect equilibrium? d. What will you do in the end? Why?

Answer 1

(a)

Riv on to, Io) Clone ,t Clo -$5,$10) C-5.20)s 50)

(b)

We use the backward induction method to solve this problem.

So, the rival gets to choose whether he wants to clone the new product or not. If he clones it he gets a pay-off of $20 million and $0 million if he does not clone. So he will choose to clone the new product as he gets a higher a pay-off.

Now given that the Rival chooses to clone it in case you introduce a new product, you would prefer to not introduce the product as it gives you a higher pay-off.

Hence, the Nash Equilibrium would be Not Introduce a New Product. ($10, $10)

(c)

Yes, there is a subgame perfect equilibrium. The rival choosing to clone or not clone the product based on pay-off is the subgame. Here, the subgame perfect equilibrium is the rival choosing to clone the product and the equilibrium is (-$5, $20).

(d)

In the end, you will choose not to introduce the product and each gets a pay-off of $10 million.

Because if you have chosen to introduce the product and rival would clone the product you would have got -$5 million, but you are better off not introducing the product at all.