Question

Question No: 07 In the context of "Game theory', answer the given question: Given below is the payoff matrix for 2 companies: Yellow (shaded part) and White for 2 alternative production strategies that each one select from This multiple shot game repeated game as production facilities are very flexible. or a can IS White's Output Strategy Low High $120 $100 Low $120 $50 Yellow's Output Strategy $50 $100 High $160 $100 (in millions of dollars) What will be the following in this game? (a) Each player's strategy (in terms of low or high output) (b) Identify the type of strategy for both companies. (c) Do you see threats in this game? Where? (d) Are these threats credible? Support your answer with logic in 10-15 words. [GM]

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Answer 1

Part a)

We can see that each player benefits from playing High than playing Low irrespective of what the other player does. Hence both players play High

Part b)

Both companies have dominant strategies (as demonstrated in part a))

Part c)

We can see that the socially optimal solution is both players playing Low and earning $120 million each instead of both playing High and earning just $100 million each. However at (Low,Low), it is not a Nash equilibrium and there's always a threat of one player deviating from the socially optimal outcome to High and earning the highest earnable payoff of $160 million.

Part d)

A credible threat is defined as a threat which a rational player will carry out. A non credible threat is defined as a threat that a rational player won't carry out.

We can see it is rational for a player to seek higher payoff of $160 million from $120 million and hence the threat is credible.