Question

A firm and its supplier are going to negotiate a deal. Since the supplier’s cost is $10 million per quarter and the value to the firm is $14 million per quarter, there is $4 million per quarter to split between the two. However, they can each hire a negotiation consultant for $500,000 per negotiation. If neither hires the consultant, each expects to get half of the $4 million pot. If only one hires the consultant, it expects to get three-fourths of the pot minus the consultant costs. If they both hire consultants, they cancel each other out and they expect to get half the pot minus the consulting costs. What is the equilibrium of this simultaneous move game?

Answer 1

SOLUTION:-

* Both the firm and the supplier have a dominant strategy of hiring a consultant.see that when the firm hires a consultant, supplier has a greater profit of 1.5 millions by hiring and only 1 million by not hiring. Similarly, when firm does not hire, the supplier again has a greater profit of 2.5 million by hiring and only 2 million by not hiring. There is,hence, a dominant strategy of hiring. Similarly, the firm has a higher payoff by hiring in any given case. Thus the only Nash equilibrium is where both hire a consultant. Circled choices are the best responses.

		Supplier
		Hire	Not Hire
Firm	Hire	(1.5,1.5)	(2.5,1)
	Not Hire	(1,2.5)	(2,2)