Besanko, Inc. and Braeutigam, Ltd. compete in the high-grade carbon fiber market. Both firms sell identical grades of carbon fiber, a commodity product that will sell at a common market price. The challenge for each firm is to decide upon a capacity expansion strategy. The following problem pertains to this choice.
a) Suppose it is well known that long-run market demand in this industry will be robust. In light of that, the payoffs associated with various capacity expansion strategies that Besanko and Braeutigam might pursue are shown in the following table. What are the Nash equilibrium capacity choices for each firm if both firms make their capacity choices simultaneously?
b) Again, suppose that the table gives the payoffs to each firm under various capacity scenarios, but now suppose that Besanko can commit in advance to a capacity strategy. That is, it can choose no expansion, modest expansion, or major expansion. Braeutigam observes this choice and makes a choice of its own (no expansion or modest expansion). What is the equilibrium in this sequential-move capacity game?
