Two firms, A and B, know that holder of a telecom license will make a profit of either £0 or £4m with equal probabilities. They bid simultaneously either £0 or £1m for this license. The highest bidder wins the license (with probability ½ if both bidders submit the same bid) and pays its bid. a) Represent the game in normal and extensive form. b) Solve the game with the relevant solution concept(s). c) Represent the game in normal and extensive form when, before bidding, firm A learns the actual profit (£0 or £4m) of the license holder. d) Solve the game in c) with the relevant solution concept(s). Does firm A benefit from learning the actual profit?
Two firms, A and B, know that holder of a telecom license will make a profit of either £0 or £4m with equal probabilities. They bid simultaneously either £0 or £1m for this license. The highest bidder wins the license (with probability ½ if both bidders submit the same bid) and pays its bid. a) Represent the game in normal and extensive form. b) Solve the game with the relevant solution concept(s). c) Represent the game in normal and extensive form when, before bidding, firm A learns the actual profit (£0 or £4m) of the license holder. d) Solve the game in c) with the relevant solution concept(s). Does firm A benefit from learning the actual profit?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Two firms, A and B, know that holder of a telecom license will make a profit of either £0 or £4m with equal probabilities. They bid simultaneously either £0 or £1m for this license. The highest bidder wins the license (with probability ½ if both bidders submit the same bid) and pays its bid.
a) Represent the game in normal and extensive form.
b) Solve the game with the relevant solution concept(s).
c) Represent the game in normal and extensive form when, before bidding, firm A learns the actual profit (£0 or £4m) of the license holder.
d) Solve the game in c) with the relevant solution concept(s). Does firm A benefit from learning the actual profit?
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