Question

GAME THEORY- Please show your work and explanation so I understand the process.

4. Firm A and B produce good x and the firms are in a normal form game of price competition. Demand for good x is given as x = 8 – P, where P is equilibrium price. Each firm can pick either $2, 4 or 6 for his price. If prices match, they split demand and if prices don’t match, then firm with lowest price meets entire demand at his price. Pay offs are in terms of revenue.(Allcostsarezero!)

(a.) Draw the 3 X 3 normal form game and list all payoffs.

(b.) Starting with firm A apply IEDS to solve the game.

(c.)For each elimination round, have A and B simultaneously eliminate any dominated strategies. In this case, what is the outcome?

Answer 1