Game Theory Assume that IBM and Dell Computer

Subject: Business    / Accounting    

Question

P11.5GameTheory.Assume that IBM and Dell Computer have an inventory of personal computers that they would like to sell before a new generation of faster, cheaper machines is introduced. The question facing each competitor is whether or not they should widely advertise a “close out” sale on these discontinued items or instead let excess inventory work itself off over the next few months. If both aggressively promote their products with a nationwide advertising campaign, each will earn profits of $5 million. If one advertises while the other does not, the firm that adver- tises will earn $20 million, while the one that does not advertise will earn $2 million. If neither advertises, both will earn $10 million. Assume this is a one-shot game and both firms seek to maximize profits.

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Promotion Strategy
    

Advertise
    

Do Not Advertise

Advertise
    

$5, $5
    

$20, $2

    

Do Not Advertise
    

$2, $20
    

$10, $10

A. What is the dominant strategy for each firm? Are these also secure strategies?

B. What is the Nash equilibrium?

C. Would collusion work in this case?