In the market for video game consoles, Microsoft and Sony are essentially a duopoly, with Nintendo at a distant third. Consider a purely hypothetical game in which the executives of the two companies are deciding how much they will spend on advertising. To simplify, assume that they can either spend a lot or spend a little. If both firms spend a lot, Sony's hypothetical profit will be $2 billion and Microsoft's hypothetical profit will be $1 billion. If they both spend a little, Sony's profit will be $9 billion and Microsoft's profit will be $7 billion. If Sony spends a lot and Microsoft spends a little, Sony's profit will be $8 billion and Microsoft's profit will be $2 billion. Finally, if Sony spends a little and Microsoft spends a lot, Sony's profit will be $3 billion and Microsoft's profit will be $6 billion. Create the payoff matrix for this game. Does Sony have a dominant strategy? If so, what is it? Does Microsoft have a dominant strategy? If so, what is it? What is the Nash equilibrium of the game?
In the market for video game consoles, Microsoft and Sony are essentially a duopoly, with Nintendo at a distant third. Consider a purely hypothetical game in which the executives of the two companies are deciding how much they will spend on advertising. To simplify, assume that they can either spend a lot or spend a little. If both firms spend a lot, Sony's hypothetical profit will be $2 billion and Microsoft's hypothetical profit will be $1 billion. If they both spend a little, Sony's profit will be $9 billion and Microsoft's profit will be $7 billion. If Sony spends a lot and Microsoft spends a little, Sony's profit will be $8 billion and Microsoft's profit will be $2 billion. Finally, if Sony spends a little and Microsoft spends a lot, Sony's profit will be $3 billion and Microsoft's profit will be $6 billion.
Create the payoff matrix for this game.
Does Sony have a dominant strategy? If so, what is it? Does Microsoft have a dominant strategy? If so, what is it?
What is the Nash equilibrium of the game?
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