According to a recent article in The Wall Street Journal, side-impact crashes are among the deadliest, accounting for nearly 10,000 deaths per year. Child safety concerns have kept auto manufacturers from making side-impact airbags standard equipment, though they are optional on most middle- to highermarket automobiles. Openly critical comments by General Motors's Ron Zarrella that other manufacturers' airbag systems inflate too powerfully and present a potential hazard to children have led to an industry wide study aimed at devising a common set of safety standards for side-impact airbag systems. Part of the trick of developing a set of standards that will protect both adults and children equally is getting the industry
to agree on a single set of standards.
Suppose that such standards are developed and that Ford and GM must simultaneously decide whether to make side-impact airbags standard equipment on all models. Sideimpact airbags raise the price of each automobile by $500. If both Ford and GM make side-impact airbags standard equipment, each company will earn profits of $1.5 billion. If neither company adopts the sideimpact airbag technology, each company will earn $0.5 billion (due to lost sales to other automakers). If one company adopts the technology as standard equipment and the other does not, the adopting company will earn a profit of $2 billion and the other company will lose $1 billion.
If you were a decision maker at GM, would you make side-impact airbags standard equipment? Explain
Game written in normal form for this scenario:
The solution provides the correct game for a game theory question involving GM and their use of airbags.