Explain the Prisoner's Dilemma game, the notion of dominant strategy, and the concept of Nash equilibrium and cooperation. Using these concepts, then, analyze the following duopoly game.
Philip Morris and R.J. Reynolds spend huge sums of money each year to advertise their tobacco products in an attempt to steal customers from each other. Suppose each year Philip Morris and R.J. Reynolds have to decide whether or not they want to spend money on advertising. If neither firm advertises, each will earn a profit of $2 million. If they both advertise, each will earn a profit of $1.5 million. If one firm advertises and the other does not, the firm that advertises will earn a profit of $2.8 million and the other firm will earn $1 million.
• If the two companies decide to collude to maximize profits, what will each company do? What profit will each company earn?
• What is the dominant strategy for each company, and what profit will each company earn if they follow those strategies?
• Is the solution you found in the first question a Nash equilibrium?
• Is the solution you found in the second question a Nash equilibrium?
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• Whenever appropriate, please use Excel to show supporting computations in an appendix, present economic information in tables, and use the data to answer follow-up questions.
The Purpose of the Paper
The purpose of this paper is to demonstrate an understanding of concepts in game theory such as the Prisoner's Dilemma game and the notion of dominant strategy, as well as Nash equilibrium and cooperation. These concepts will be used to analyze a duopoly game involving tobacco giants Philip Morris and R.J. Reynolds.
The Prisoner's Dilemma
A company will seldom operates in a vacuum. Instead, a company can often expect competition. The actions of one company may affect the decisions made by its competitors. Even an assumption of what actions a company may or may not take could ...
The expert examines the prisoner's dilemma and the nash equilibrium. The solution is answered in 1133 words.
Solution contains explanation of Nash Equilibrium in pure strategy, Prisoner's Dilemma and interrelation between both of them through an example.
Below is a payoff matrix for Intel and AMD. In each cell, the first number refers to AMD's profit, while the second is Intel's.
a. Is there a Nash Equilibrium(s)? Why or why not?
b. Is this an example of the Prisoner's Dilemma? Why or why not?
AMD Lower Price Same Price Higher Price
Lower Price -2, -6 6, -2 12,-15
Same Price 6,14 9, 8 15, 4
Higher Price -13,7 3, 9 16,20