SOLVED QUESTIONS

Q1. Expansion in a production facility is a strategy considered by firms in an oligopolistic

market. The situation faced by two firms is as follows:

Firm 2
Expand Do not expand
Firm 1 Expand 8, 8 20 , 0
Do not expand 0, 20 10, 10
(a) Does either firm have a dominant strategy?
(b) What would the equilibrium of the Game?

Solution:

(a) Both Firm 1 and Firm 2 have a dominant strategy of Expand.

(b) Nash equilibrium of the game is {Expand, Expand}.

Q2. You are given the following pay-off matrix:

Firm 2
Increase Price Keep price same
Firm 1 Increase price 12, 10 4, 12
Keep price same 16, 2 8, 6
The pay-offs are profits.

a) What is/are the Nash equilibrium of the above game?

b) If both firms collude, what would be the outcome? Why achieving cooperative
equilibria difficult in Prisoner’s dilemma situation.
c) Is it a Prisoner’s Dilemma Situation? Explain.
d) What would happened if the top right cell became (10,10)?

Solution:

a) NE – {Keep price same, Keep price same}

b) If both firms collude (collaborate), they will choose {Increase price, Increase Price}.
c) Yes, they together could have done better by choosing “Increase Price” and getting
payoff 12 and 10 respectively. However, they end-up with a lower payoff of 8 and 6
respectively.
d)

Firm 2
Increase Price Keep price same
Firm 1 Increase price 12, 10 10, 10
Keep price same 16, 2 8, 6

Firm 2 has a dominant (weakly) strategy of choosing “Keep price same”. Being a
rational player, Firm 1 will know that given the above pay-offs, player 2 will always
 choose its dominant strategy of “Keep price same”. So, Firm 1 is better choosing
“Increase price”. Equilibrium will be: {Increase price, keep price same}

Q3. Suppose two criminals want to rob a jewellery showroom, and by robbing the showroom,
they can get Rs. 10,000 each. But it requires two people, one to rob the showroom, and other
to ride the getaway vehicle. The criminals can instead rob a grocery store, from where each
will get Rs.5000 only, but it can be carried out by a single person.

(i) What is the pay-off matrix of this game?

(ii) Write down the strategies for this game.
(iii) Is there a dominant strategy for the two criminals?
(iv) Write all the Nash equilibrium for this game.

Solution:
(i)

CRIMINAL 2
Jewellery Grocery store
showroom
CRIMINAL 1 Jewellery 10000 , 10000 0 , 5000
showroom
Grocery store 5000 , 0 5000 , 5000

(ii) Criminal 1 : If criminal 2 chooses to rob the jewellery showroom, criminal 1

will also choose to rob the jewellery showroom.
Criminal 2 : If criminal 1 chooses to rob the grocery store, criminal 2 will
also choose to rob the grocery store.

(iii) There is no dominant strategy for any of the criminals.

(iv) There exists Nash Equilibrium at two strategies, namely {Jewellery

showroom, Jewellery showroom} and {Grocery store, Grocery store}. No
criminal will be better off by a change in the strategy, given the strategy of the
other at these two points.

Q4. Two firms are in the chocolate market. Each can choose to go for the high end of the
market (high quality) or the low end (low quality). Resulting profits are given by the
following payoff matrix:

Firm 2

Low High
 Low -20, -30 900, 600

Firm 1 High 100, 800 50, 50

What outcomes, if any, are Nash equilibria?

Answer: If Firm 2 chooses Low and Firm 1 chooses High, neither will have an incentive to
change (100 > -20 for Firm 1 and 800 > 50 for Firm 2). If Firm 2 chooses High and Firm 1
chooses Low, neither will have an incentive to change (900 > 50 for Firm 1 and 600 > -30 for
Firm 2). Both outcomes are Nash equilibria. Both firms choosing low is not a Nash
equilibrium because, for example, if Firm 1 chooses low then firm 2 is better off by switching
to high since 600 is greater than -30.

Q5. There are two firms in a market A and B, trying to maximize their market shares by
adopting two strategies: discount (D) and advertisement (A). Firm A plays first and Firm B
follows, as represented below. What is the equilibrium of this game?

Firm A

D A

Firm B Firm B

D A D A

(Rs.200, 200) (Rs.300, Rs. 400) (Rs.400, Rs 300) (Rs.100, Rs 100)

Solution:
If firm A chooses D strategy, firm B will choose strategy A, firm A gets Rs.300

If firm A chooses A strategy, firm B will choose strategy D, firm A gets Rs.400

So, the equilibrium is {A; A,D}

Q6. Suppose there are two players. Player 1 is an internet service provide and Player 2 is a
potential customer. The internet service provide has to decide between two levels of quality
of service, High or Low. The customer also has two options, either to buy or not to buy the
contract. But for the customer a high-quality service is more valuable than a low-quality
service, whereas for the firm the high-quality service is difficult and costly to provide than a
low-quality service. If the firm supplies a high-quality service and the customer buys it, then
both have a payoff of 3. If the firm provides a high-quality service and the customer does not
buy it, then the firm’s payoff is zero and the customer’s payoff is 1. If the firm provides a
low-quality service and the customer buys it, then the firm has a payoff of 4 and the customer
has a payoff of zero. But if the firm provides a low-quality service and the customer does not
buy it, both have a payoff of 1.

a) Draw the payoff matrix for this game.

b) Determine the equilibrium in this game.
c) Consider the same game, except that when the firm provides a low-quality service and
the customer buys it, then the firm has a payoff of 1 (instead of 4) and the customer’s
payoff is zero. Determine the new Nash equilibrium.

Solution: a)

Customer
Service Buy Don’t Buy
Provider
High quality 3, 3 0, 1

Low quality 4, 0 1, 1

b) Service provider has a dominant strategy of choose “Low quality”. Customer do not have a
dominant strategy. However, customer will know that SP will always choose “Low quality”.
Therefore, Customer is better-off choosing “Don’t Buy”. NE – {Low quality, don’t buy}.
c)

Customer
Service Buy Don’t Buy
Provider
High 3, 3 0, 1

Low 1, 0 1, 1

There are two Nash equilibria: {High, Buy}; {Low, Don’t Buy}.

Q7. Suppose producers of two reality shows are deciding on the airtime for airing their
respective shows on separate channels. The available slots are 9:00 p.m. and 10:00 p.m.
Market research shows that 9:00 PM is a preferred time for watching the news and audiences
prefer the 10:00 PM slot for a reality show. Both the television producers compete for the
prime time 10:00 PM slot, but they also want to avoid the same time slot that would split the
audience. Total audience for 9:00 PM show is 1000, of which 400 consumers will strictly
watch News in another network over either of the shows. Total audience for 10 PM show is
800. If both the producers telecast their show at the same time, the divide the audience
equally. If one show is at 9:00 PM and another at 10 PM, 9:00 PM show gets 400 consumers
and 10:00 PM show gets all 800 audience. If the producers want more viewership, what
would be the Nash equilibrium of the game.

Answer:

Channel 2
Channel 1 9:00 pm 10:00 pm

9:00 300, 300 400, 800

pm

10:00 800, 400 400, 400

pm

Nash equilibrium: {10:00pm, 10:00 pm}

Q8. Two colleagues having same friend circle are getting married in the same month, but
these two are currently not on the speaking terms. Both of them are planning to host a
bachelor party in the coming weekend, either Friday or Saturday evening (both somewhat
prefers Saturday). If both of them host the party on the same day, their pay-offs will be – 10
for both. If one of them hosts on Friday and the other one on Saturday, the Friday party will
get a payoff of 4 and the Saturday party will get a payoff of 5. Does Nash equilibrium exist?
If yes, what is the equilibrium?

Solution:

Friend 2
Friend 1 Friday Saturday

Friday -10, -10 4, 5

Saturday 5, 4 -10, -10

NE: {Friday, Saturday}; {Saturday, Friday}

Q9. Suppose an entrant wants to enter a market that is currently served by a monopolist, who
earns profits of 5. If the entrant enters the market and the monopolist engages in a price war,
the entrant will make losses of 5 and the monopolist’s profit will also fall to 1. If the
monopolist accommodates entry, both the firms will earn equal profits of 2 each. If you were
a consultant to the entrant, would you advise your client to enter?

Entrant

Enter Don’t Enter

Monopolist

(0, 5)

Accommodates Price war

 (2, 2) (-5, 1)

N.E. {Enter, Accommodates}

Q10. A major factor that affects earning in film production is the timing of the film release,
which peaks around the festive week of Diwali in India. Suppose that two major production
houses are thinking of releasing their films on either the Diwali week or later. The production
houses are Yash Raj Films (YRF) and Ajay Devgn Films (ADF). If both films open on
Diwali, both films will split the market and earn Rs 200 million each. If one opens on Diwali
and other postpones the release, then the former will warn Rs 250 million, while the later will
earn Rs 150 million. If both open on the post-Diwali week, both will earn Rs 100 million.

a) If they decide the release date simultaneously, what will be the Nash equilibrium.

YRF
ADF Diwali release Post Diwali release

Diwali release 200, 200 250, 150

Post Diwali release 150, 250 100, 100

N.E. {Diwali release, Diwali release}

b) Now suppose that YRF writes a contract with the film distributors and theatres for the
release of the film during Diwali before ADF and ADF knows about it. Will the
equilibrium change?
NE: {Diwali, Diwali}
YRF

Post Diwali
Diwali

ADF
ADF
Post Diwali
Diwali Post Diwali
Diwali

200,200 150, 250 100, 100

250, 150