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    Game Theory Concepts/Nash Equilibrium

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    Recognize each of the following statements as being true or false and explain why

    A. A set of strategies constitutes a Nash equilibrium if no player can improve their position given the strategies chosen by other players.

    B. A secure strategy is very conservative and should only be considered if the rival's optimal strategies very conservative and should only be considered if the rival's optimal strategy is identical.

    C. A dominant strategy is also a secure strategy, but very secure strategy is not necessarily a dominate strategy.

    D. In a one-shot game, the Nash equilibrium is also the best outcome that can be achieved under collusion.

    E. If a player has non dominate strategy, it pays to look at the game from the rival's perspective and anticipate the rival choosing its dominate strategy.

    Nash Equilibrium

    The breakfast cereal industry is heavily concentrated. Kellogg, General Mills, General Foods, (Post) and Ralcorp account for over 85 percent of industry sales. Advertising by individual firms does not convince more people to eat breakfast. Effective advertising simply steals sales from rivals. Big profit gains could be had if these rivals could simply agree to stop advertising,. Assume Kellogg and General Mills are trying to set optimal advertising strategies. Kellogg can choose either row in the payoff matrix, where as General Mills can choose either column. The first number in each cell is Kellogg's Payoff; the second number is the payoff to General Mills. This is one-shot simultaneous-move game, and the first number in each cell is the profit payoff to Kellogg. The second number is the profit payoff to General Mills.

    Competitive Strategy Advertising Don't Advertise
    Advertise $800 million, $800 million $1.5billion, $600 million
    Don't Advertise $600 million, $1.5 billion $ 1 billion, $1 billion

    A. Briefly describe the Nash equilibrium concept.
    B. Is there a Nash equilibrium strategy for each firm? If so, what is it?

    B. Both advertise

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    Solution Preview

    Answer A:TRUE. This is according to the definition of Nash Equilibrium. In a Nash equilibrium no one can improve his/her strategies given the opponents strategy.

    Answer B: TRUE. Secure strategy rarely results in a ...

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