Synergy and Dynaco are the only two firms in a specific high-tech industry. They face the...
Synergy and Dynaco are the only two firms in a specific high-tech industry. They face the following payoff matrix as they decide upon the size of their research budget:
(a) Does Synergy have a dominant strategy? Explain.
(b) Does Dynaco have a dominant strategy? Explain.
(c) Is there a Nash equilibrium for this scenario? Explain. (Hint: Look closely at the definition of
Nash equilibrium.)
Homework Answers
Dominant strategy is the strategy that is optimal pay off for the firm irrespective of the behaviour of the other firm.
a). No, synergy does not have a dominant strategy. If Dynaco chooses small budget, Synergy is better off choosing small budget. If Dynaco chooses large budget, Synergy is better off choosing large budget.
b). Indeed Dynaco does have a dominant strategy. It will have large budget, irrespective of what budget Synergy has, it'll be better off.
c). Yes, this is a Nash equilibrium. Neither player can improve his or her payoff by unilaterally changing his or her strategy, given the other player's strategy. The Nash Equilibrium would be at (large budget, large budget) having pay-offs $30million, $20 million.
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