Question

Two property developers, Classical Land and Keynes Development, are contemplating launching their properties for sales around the months of June or July. If both launch their properties in June, both companies can earn $20 million. If both launch their properties in July, both companies can earn $10 million. If one company launches in June and the other company launches in July, the company that launches in June will earn $35 million and the company that launches in July will earn $15 million.

1. If both companies choose their launching date simultaneously, construct and describe a payoff matrix and solve for the Nash equilibrium.

(13 marks)

2. If Classical Land can decide on its launching date first, construct the decision tree model and determine the payoffs to Classical Land and Keynes Development.

(12 marks)

Answer 1

(a) The game can be represented in the form as given below.

Nash equilibrium involves strategic choice that once made, provide no incentive for players to change their behaviour further. So given the others equilibrium strategies, Nash equilibrium provides the best choice for each player. By underlining the best response payoff, we can find the Nash equilibrium (Nash equilibrium occurs when both all payoff gets underlined for a strategy matrix). So in this game the Nash equilibrium will occur at (June, June)

	Keynesian Development
June	July
Classical Land	June	(20,20)	(35,15)
July	(15,35)	(10,10)

(b) (a) If CL decides to launch in June, KD will also launch in June as they are getting a higher payoff there. If CL decides to launch in July then the best decision for KD will be launching in June.

Classical Land June July Keynesian Development Keynesian Development July July June June (20.20 (35.15) (15,35) (10,10)