Question

Each of two aircraft manufacturers Alex and orbit is considering whether to introduce a new air craft. however in their view the market is not big enough for both of them to introduce a new aircraft. however, in their view the market is not big enough for both of them to introduce a new air craft.

Based on game theory framework:

a. how would you describe their strategies and expected outcomes (you may use hypothetical numbers in millions of US dollars)?

b. do they have a dominant strategy? explain

c. what would be the outcome? explain

Answer 1

A)

All payoff are in millions.

Initially ( before introduce the new aircraft), both was earning 100 million Profit.

If one of introduce new aircraft,then some of Initial demand of old aircraft will fall and Profit Decreases by 5 million each and the firm who introduced new aircraft will earn a additional 10 million payoff.

If both introduce new aircraft then price of aircraft will be too low that both Profit will decrease by 2 million.

B)given orbit move introduce ,best move of alex is introduce.

Given orbit move don't introduce , best response of alex is introduce,

So alex has a dominant strategy of introduce and same for orbit.

C) as discribed in part b) that both have a dominant strategy ,so they choose to introduce the new aircraft.

And given other's move , no firm has an incentive to change their action . So outcome will be ; both will introduce the new aircraft. And bear a loss of 2 million.