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Strategic form payoff matrix

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Envison a pricing problem between MOnsanto and Holand Sweetner in 1992 that led to the Monsanto contract. Assume:

1) Cost to Holland Sweetner of entering US market is $25 million
2) Monsanto & Holland Sweetner simultaneously choose to quote either a high or low price to Pepsi and Coke for aspartame
3) If both Monsanto and Holland Sweetener quote the same price, Pepsi and Coke contract wiith Monsanto because customers are familiar with the Nutra Sweet label,
H lland Sweetener loses its initial investment
4) If both firms submit high price, Monsanto nets $300 million
5) If bother firms submit a low price, Monsanto nets $100 million
6) If Monsanto prices high and Holland Sweetner prices low, Holland Sweetener nets $100 million and MOnsant nets $0

Question - Construct the strategic form payoff matrix, Find the Nash equilibrium, Assume the interaction is sequential where Holland Sweetener chooses to enter and if so they face the pricing problem in the second stage. Should Holland Sweetener enter? Why did they enter?

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Solution Summary

The solution constructs a Strategic form payoff matrix for the scenario provided and also explains several other concepts related to Nash equilibrium. Overall, an excellent solution to the question being asked.

Solution Preview

Please see the attachment for the payoff diagrams and decision tree for sequential game.

The explanation is below:
In a simultaneous game, the dominant strategy for Holland is to price Low as it ...

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