8. Collusive outcome versus Nash equilibrium Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning. If neither restaurant cleans, each will earn $12,000; alternatively, if they both hire workers to clean, each will earn only $9,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $16,000, and the other restaurant will make only $4,000. Complete the following payoff matrix using the information just given. (Note: All-You-Can-Eat Café and GoodGrub Diner are both profit-maximizing firms.) All-You-Can-Eat Café Cleans Up Doesn't Clean Up Cleans Up GoodGrub Diner Doesn't Clean Up If All-You-Can-Eat Café and GoodGrub Diner decide to collude, the outcome of this game is as follows: All-You-Can-Eat Café GoodGrub Diner and If both restaurants decide to cheat and behave noncooperatively, the outcome reflecting the unique Nash equilibrium of this game is as follows: All- You-Can-Eat Café , and GoodGrub Diner
8. Collusive outcome versus Nash equilibrium Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning. If neither restaurant cleans, each will earn $12,000; alternatively, if they both hire workers to clean, each will earn only $9,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $16,000, and the other restaurant will make only $4,000. Complete the following payoff matrix using the information just given. (Note: All-You-Can-Eat Café and GoodGrub Diner are both profit-maximizing firms.) All-You-Can-Eat Café Cleans Up Doesn't Clean Up Cleans Up GoodGrub Diner Doesn't Clean Up If All-You-Can-Eat Café and GoodGrub Diner decide to collude, the outcome of this game is as follows: All-You-Can-Eat Café GoodGrub Diner and If both restaurants decide to cheat and behave noncooperatively, the outcome reflecting the unique Nash equilibrium of this game is as follows: All- You-Can-Eat Café , and GoodGrub Diner
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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8. Collusive outcome versus Nash equilibrium
Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health
and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know
that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning.
If neither restaurant cleans, each will earn $12,000; alternatively, if they both hire workers to clean, each will earn only $9,000. However, if one cleans
and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $16,000, and the other restaurant will
make only $4,000.
Complete the following payoff matrix using the information just given. (Note: All-You-Can-Eat Café and GoodGrub Diner are both profit-maximizing
firms.)
All-You-Can-Eat Café
Cleans Up
Doesn't Clean Up
Cleans Up
GoodGrub Diner
$
Doesn't Clean Up
If All-You-Can-Eat Café and GoodGrub Diner decide to collude, the outcome of this game is as follows: All-You-Can-Eat Café
GoodGrub Diner
and
If both restaurants decide to cheat and behave noncooperatively, the outcome reflecting the unique Nash equilibrium of this game is as follows: All-
You-Can-Eat Café
, and GoodGrub Diner
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