Consider two strategically dependent firms in an oligopolistic industry, Firm A

Question

Consider two strategically dependent firms in an oligopolistic industry, Firm A and Firm B. Firm a knows that if it offers extended warranties on its products but Firm B does not, it will earn $6 million in profits, and Firm B will earn $2 million in profits. Likewise, Firm B knows that if it offers extended warranties but Firm A does not, it will earn $6 million in profits, and Firm A will earn $2 million. The two firms know that if they both offer extended warranties on their products, each will earn $3 million in profits. Finally, the two firms know that if neither offers extended warranties, each will earn $5 million in profits.

(a) Construct a payoff matrix that fits the situation faced by these two firms.

(b) What is the strategy for each firm in this situation? explain

(c) Is there a dominant strategy for each? Explain.

Explanation / Answer

Both firms have a dominant strategy - to offer extended warranties (No matter what the other firm does, decision making firm would earn a higher payoff when opting for this strategy)

Firm A - offers extended warranties

Firm B - offers extended warranties

Firm B Offers warranties Does not offer warranties Firm A Offers warranties $3 mn,$3 mn $6 mn, $2 mn Does not offer warranties $2 mn, $6 mn $5 mn, $5 mn

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