Gillette and Schick are two of the dominant manufactures of disposable razors worldwide. Each firm can either sign or not sign an exclusive contract with Hugh Jackman to appear on their TV ads. If both companies manage to sign with Jackman, they will each make $7 million in economic profit. If only one of them signs, it earns $10 million in economic profit and the other firm incurs an economic loss of $1.5 million. If neither firm signs, they only make normal profit. Build the pay-off matrix for the above game. Identify “Nash Equilibrium”, if any. Is this equilibrium optimal for both companies? Justify your answer.
Gillette and Schick are two of the dominant manufactures of disposable razors worldwide. Each firm can either sign or not sign an exclusive contract with Hugh Jackman to appear on their TV ads. If both companies manage to sign with Jackman, they will each make $7 million in economic profit. If only one of them signs, it earns $10 million in economic profit and the other firm incurs an economic loss of $1.5 million. If neither firm signs, they only make normal profit. Build the pay-off matrix for the above game. Identify “Nash Equilibrium”, if any. Is this equilibrium optimal for both companies? Justify your answer.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Gillette and Schick are two of the dominant manufactures of disposable razors worldwide. Each
firm can either sign or not sign an exclusive contract with Hugh Jackman to appear on their TV
ads. If both companies manage to sign with Jackman, they will each make $7 million in economic
profit. If only one of them signs, it earns $10 million in economic profit and the other firm incurs
an economic loss of $1.5 million. If neither firm signs, they only make normal profit.
Build the pay-off matrix for the above game. Identify “Nash Equilibrium”, if any. Is this
equilibrium optimal for both companies? Justify your answer.
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