8. Collusive outcome versus Nash equilibrium Consider a remote town in which two

Question

8. Collusive outcome versus Nash equilibrium Consider a remote town in which two restaurants, All-You-Can-Eat Café and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning. If neither restaurant cleans, each will earn $14,000; alternatively, if they both hire workers to clear each will earn on ·$1. 000 owever fore cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $18,000, and the other restaurant will make only $6,000 Complete the following payoff matrix using the information just given. (Note: All-You-Can-Eat Café and GoodGrub Diner are both profit-maximizing firms.) GoodGrub Diner Cleans Up Doesn't Clean Up Cleans Up All-You-Can-Eat Café Doesn't Clean Up If All-You-Can-Eat Café and GoodGrub Diner decide to collude, the outcome of this game is as follows: All-You-Can-Eat Café and GoodGrub Diner If both restaurants decide to cheat and behave noncooperatively, the outcome reflecting the unique Nash equilibrium of this game is as follows: All You-Can-Eat Café , and GoodGrub Diner

Explanation / Answer

Collusion:

Both restaurants would not clean up and each will earn $14000

Noncooperative behaviour:

Both restaurants would clean up and each will earn $11000 (Cleaning up is the dominant strategy for each of these restaurants where no matter what action the other restaurant takes, cleaning up would provide better returns to the restaurant taking a decision)

GoodGrub Diner Cleans Up Doesn't Clean Up All You Can Eat Café Cleans Up 11000, 11000 18000, 6000 Doesn't Clean Up 6000, 18000 14000, 14000

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