Question

-answer all of the questions.

- type answers on a computer. Do not print by hand!

topic: game theory/ price strategy

Suppose Toyota and Honda must decide whether to make a new breed of side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile by $1,000. If both firms make side-impact airbags standard equipment, each company will earn profits of $2.5 billion. If neither company adopts the side-impact air- bag technology, each company will earn $1 billion (due to lost sales to other automak- ers). If one company adopts the technology as standard equipment and the other does not, the adopting company will earn a profit of $3 billion and the other company will lose $1.5 billion. If you were a decision maker at Honda, would you make side-impact airbags standard equipment? Explain.

Answer 1

		Toyota
		Adopt	Not Adopt
Honda	Adopt	2.5, 2.5	3, 1.5
	Not Adopt	1.5, 3	1, 1

Two players: Honda and Toyota

Two strategies: To adopt side airbags or not adopt them

When Honda chooses to adopt for side bags, Toyota will also choose to adopt them as it gets a higher pay-off.(2.5 > 1.5)

When Honda chooses to not adopt for side-bags, Toyota will choose for adopting them as it gives a higher pay-off.(3 > 1)

Similarly, when Toyota chooses to adopt for side bags, Honda will choose to adopt as it gives a higher pay-off.(2.5 > 1.5)

When Toyota chooses to no adopt the side bags, Honda will choose for the side bags, as it gives him a higher pay-off.(3 > 1)

Then the Nash equilibrium is to adopt for side bags for both the companies = (Adopt, Adopt) = (2.5, 2.5)

Yes, as it will give me maximum profit.