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Two firms are competing in an oligopolistic industry. Firm 1, the larger of the two, is contemplating its capacity strategy, which we can broadly characterize as "aggressive" or "passive." The "aggressive" strategy involves a large increase in capacity aimed at increasing the firm's market share, while the "passive" strategy involves no change in the firm's capacity. Firm 2, the smaller competitor, is also pondering its capacity expansion strategy; it will also choose between an "aggressive," or "passive" strategy. The list below shows the corresponding profits associated with each outcome.

Firm 1: "Aggressive" profit 36. Firm 2: "Aggressive" profit 12.

Firm 1: "Aggressive" profit 30. Firm 2: "Passive" profit 13.

Firm 1: "Passive" profit 33. Firm 2: "Aggressive" profit 10.

Firm 1: "Passive" profit 25. Firm 2: "Passive" profit 9.

(a) If both firms decide their strategies simultaneously what is the Nash Equilibrium (NE) of the game?

(b) Continuing with the simultaneous move assumption, does Firm 1 have a dominant strategy, if so, what is it?

(c) Does Firm 2 have a dominant strategy, if so, what is it(d) Now, if Firm 1 could move first, with Firm 2 moving second, i.e. reacting to Firm 1's move, what is the Nash equilibrium (NE) of this sequential move game?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M9476351

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