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    Describe a political, economic, or social interaction of decision makers that you have witnessed or heard about in words. The situation should involve decision makers (players), available actions (strategies), and outcomes that correspond to combinations of actions. The example can be anything from international relations (treaties, trading agreements, wars), to government policies, social interactions of people, interactions of your colleagues, classmates at work etc.

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    SOLUTION This solution is FREE courtesy of BrainMass!

    Consider the case of competition between companies. Let us say that both McDonald and KFC are interested in expanding to a new country (currently there is no fast food brands in this country). Because two brands are equally powerful, they each gained 50% of the market share, and let us just say that 50% market share leads to 10 million dollars of revenue every year (so the country spends 20 million dollars on fast food every year).

    Either firm could decide to put more money input marketing. If one firm markets and the other does not, then the firm that markets will gain 75% market share (which means 15 million revenue per year). If both markets, then they stay at the 50% market share level. On the other hand, marketing is costly, so if a firm decides to market, they need to speed 2 million dollars.

    What should each firm do?

    If neither firm markets, they each make 10M
    If one markets and they other does not, the marketing firm will get 75% market share (which is 15M) less the marketing fee (2M) which equals 13M. The firm that does not market gets 25% market share which is 5M.
    If both markets, they still get 50% market share (10M) but less marketing fee, which end up with 8M each.

    In matrix form, we have.

    Marketing No Marketing

    Marketing 8,8 13,5


    No Marketing 5,13 10,10

    This is a typical example of prisoner's dilemma. Ideally, neither firm should market. But because they each care about their own payoff, they will start to market in order to beat their opponent. And ultimately, both would market and they end up with 8M each instead of 10M each. (market, market) is called a Nash Equilibrium and this example illustrates that the equilibrium is not always the best outcome.

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