Finding Nash equilibrium
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Assume two competitors, American International Group (AIG), Inc., and Axa, SA., are locked in a bitter pricing struggle in the reinsurance business. In the pricing payoff matrix, AIG can choose a given row of outcomes by offering a limit price ("up") or monopoly price ("down"). Axa can choose a given column of outcomes by choosing to offer a limit price ("left") or monopoly price ("right"). Neither firm can choose which cell of the payoff matrix to obtain; the payoff for each firm depends upon the pricing strategies of both firms.
Axa
AIG Pricing Strategy Limit Price Monopoly Price
Limit Price $8 billion, $3 billion $12 billion, $2 billion
Monopoly Price $6 billion, $5 billion $10 billion, $4 billion
(Find above chart attached).
A. Is there a Nash equilibrium in this problem? If so, what is it?
B. Describe the potential benefits to be derived from collusion. Do you see any obstacles to coordinating such collusion?
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Solution explains how to find a Nash equilibrium.
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There is a Nash equilibrium, which is that both AIG and AXA play limit price (and the payoff is ...
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