Considered the following market. Chrome can choose when launching its new product either to do it...

Considered the following market. Chrome can choose when launching its new product either to do it LARGE or as NICHE. After Chrome has chosen its action, Firefox observes Chromes choice and then can choose to ADAPT to RETAIN its own product. After Firefox has chosen its action, the game ends and the payoffs are made. The payoffs are as follows. If Chrome chooses LARGE and Firefox ADAPT, the payoffs are 25 and 40 to Chrome and Firefox, respectively. If Chrome goes LARGE and Firefox RETAINS the payoffs are 30 and 50 to Chrome and Firefox. If Chrome plays NICHE and Firefox ADAPTS, the payoffs are (40 Chrome, 30 Firefox) and if Chrome plays NICHE and Firefox RETAINS the payoffs are (20, 20) for Chrome and Firefox, respectively.

a. What is a Nash equilibrium? Outline the Nash equilibrium or equilibria in the game, and explain your answer.
b. What is a subgame perfect (or credible) equilibrium and how would you find such an equilibrium? What is outcome in the the subgame perfect equilibrium in this game? Explain your answer.

c. Does the subgame perfect equilibrium (or credible) equilibrium result in the outcome that maximises total surplus? If it is, explain why. If not, is there some transfer between the two parties that can help achieve the surplus-maximising result? Explain your answer.

Expert Solution

Rahul Sunny answered 1 year ago

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