I need some help with answering this problem:
Strategy Advertise Don't Advertise
Firm A Advertise $4,$4 $20, $1
Don't Advertise $1, 20 $10, $10
A. Does anyone have a dominant strategy?
B. What is the Nash Equilibrium?
C. What is the socially optimal solution (at what point is total profit maximized)?
D. How would a negotiated solution lead to this socially optimal solution?
E. If you had to call in a mediator to negotiate this socially optimal solution, how much would they charge and why?
This is a somewhat classic Game Theory problem:
A. Firstly, the concept of dominant strategies has been raised. A weakly dominant strategy is at least as good in most contingencies, and better in one contingency. A strictly dominant strategy is better in all contingencies. Lets look at the payoffs:
Firm A appears to have a dominant strategy (advertise). Consider where Firm B decides to ...
Nash equilibrium and dominant strategies are examined.