Game Theory 7. Refer to the extensive-form game of price competition shown below.(-10, 50)CloneIntroduceDo NotAClone(500, 0)Do NotIntroduce(5, 5)Firm A must decide whether or not to introduce a new product. If firm A introduces a new product, firm B mustdecide whether or not to clone the product. The payoff structure of the game is depicted as above. The subgameperfect Nash equilibrium to this game is:A. Firm A plays "Introduce"; firm B plays "Clone" if firm A plays "Introduce."B. Firm A plays "Do Not Introduce"; firm B plays "Clone" if firm A plays "Introduce."C. Firm A plays "Introduce"; firm B plays "Do Not Clone" if firm A plays "Introduce."D. Firm A plays "Do Not Introduce"; firm B plays "Do Not Clone" if firm A plays "Introduce."

We use backward induction to solve this question. In game theory, Backward induction is an iterative…

Answered: Firm A must decide whether or not to…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter15: Imperfect Competition

Section: Chapter Questions

Problem 15.8P

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Game Theory

7. Refer to the extensive-form game of price competition shown below.
(-10, 50)
Clone
Introduce
Do Not
A
Clone
(500, 0)
Do Not
Introduce
(5, 5)
Firm A must decide whether or not to introduce a new product. If firm A introduces a new product, firm B must
decide whether or not to clone the product. The payoff structure of the game is depicted as above. The subgame
perfect Nash equilibrium to this game is:
A. Firm A plays "Introduce"; firm B plays "Clone" if firm A plays "Introduce."
B. Firm A plays "Do Not Introduce"; firm B plays "Clone" if firm A plays "Introduce."
C. Firm A plays "Introduce"; firm B plays "Do Not Clone" if firm A plays "Introduce."
D. Firm A plays "Do Not Introduce"; firm B plays "Do Not Clone" if firm A plays "Introduce."

Definition Definition Economic decision-making framework that analyzes how different players optimize their outcomes with given pay-offs corresponding to their available strategies. The assumptions of game theory are: The number of players or competitors are finite/limited; All participants are rational The rules of the game are known to every player; and Each participant has a finite set of actions. A common way in which game theory is presented as an ( m x n ) matrix in which m represents the strategies of row player and n represents the strategies of column player. There are several limitations of game theory: Many businesses have a large number of competitors, and selecting an optimal strategy in these circumstances is difficult; Real-life business operating environments are full of uncertainty and difficult to model as a game theory; and The assumption of rationality and utility maximization isn't always an accurate portrayal of human nature.

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