Firm 1 and Firm 2 compete in an industry and must decide whether to introduce an upgrade to their existing products.
Game Theory
Firm 1 and Firm 2 compete in an industry and must decide whether to introduce an upgrade to their existing products. The nature of the
strategic interaction is described by the game box, where (Y) means “upgrade” and (N) means “do not upgrade”. The upgrade is costly and
may or may not be a good business decision.
a. Assume Firm 1 and Firm 2 move simultaneously. Derive the NASH equilibrium of this game.
b. Assume Firm 1 and Firm 2 move sequentially. In particular, Firm 1 makes the initial move and decides whether to introduce the upgrade.
Then, Firm 2 observes the decision of Firm 1 and decides whether to introduce the upgrade.
c. Draw the game tree representation of this game and determine the subgame perfect NASH equilibrium.
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