Question

HalHal

and

NickNick

are racing to develop a new brand of

tooth whitenertooth whitener.

They both believe that it will be

more effective than all othersmore effective than all others.

HalHal

and

NickNick

know that if they both develop the new​ product, they will make zero economic​ profit; if only one of them develops the new​ product, that firm will make an economic profit of

​$2.52.5

million a week and the other will incur an economic loss of

​$1.01.0

million a​ week; and if neither of them develops the new​ product, both will make an economic profit of​ $1.0 million.

Answer 1

		Nick Nick
		Develop the Product	Do not develop the product
Hal Hal	Develop the Product	(0,0)	(2.5,0)
Do not develop the product	(0,2.5)	(1,1)

The above matrix shows combinations which both developer can adopt.

• If Hal Hal deveops the product, Nick Nick will be equally likely to develop or do not develop as both of possibilities give them equal profit of 0.
• If Hal Hal does not develop the product, Nick Nick will develop the product as it maximizes their profit among possibiility of 2.5 or 1.

Strictly dominant strategy of Nick Nick is to develop the product.

• If Nick Nick deveops the product, Hal Hal will be equally likely to develop or do not develop as both of possibilities give them equal profit of 0.
• If Nick Nick does not develop the product, Hal Hal will develop the product as it maximizes their profit among possibiility of 2.5 or 1.

Strictly dominant strategy of Hal Hal is to develop the product.

Nash equilibrium of the market occurs when both of them develops the product.