Ace and Baumont Corporations make and sell electrical equipment. Both have to decide whether or not to discount. The payoff matrix of "Discount" and "Not to Discount" expressed in terms of profit (+) or loss (-) for each firm is given below for each combination of strategies.
Baumont Corporation
No Discount Discount
No Discount ($10mil, $10mil) (-$4mil, $16mil)
Ace Corporation
Discount ($16mil, -$4mil) (4mil, $4mil)
In the above matrix, the first number is for Ace and the second, for Baumont respectively.
a. What are the optimum strategy for each, the resulting profit/loss for each and why?
b. Is there any other strategy better than the one they took in (a), which makes each firm better off as opposed to the strategy taken? If there is, why did they not take it?
c. How would you compare this case to the so called "prisoner's dilemma" case? Explain it clearly.
d. How would you compare this case to the so called "Nash Equilibrium"? Explain the difference between this case and Nash Equilibrium clearly.
e. Does it matter whether this is one-shot deal or meant to be a situation in which each corporation faces continuously for some time? Why or why not?
f. Suppose that the profits for "discount strategy" for both Ace and Baumont are reduced to $8 million from the current profit of $16 million respectively. The revised payoff matrix is shown below for your convenience.
Baumont Corporation
No Discount Discount
No Discount ($10mil, $10mil) (-$4mil, $8mil)
Ace Corporation
Discount ($8mil, - $4mil) ($4mil, $4mil)
What would be the optimum strategy for each and why?
g. What fundamental changes took place in the revised matrix above, which made the situation quite different from the original payoff matrix at the beginning? Please be succinct and to the point in your explanation.
h. How does such a corporation as General Electric use the concept involved in the revised payoff matrix above in its marketing strategy? Be specific in your explanation.