Suppose that two firms compete on the basis of location. At intersection A there

Question

Suppose that two firms compete on the basis of location. At intersection A there are 10 customers, at intersection B there are 5 customers, and at intersection C there are 12 customers. Each firm locates at 2 intersections. A firm’s profit is equal to the number of customer’s at any intersection where it is the monopoly less the number of customers it loses at the intersection where it is not located. Illustrate the strategic form game box and find the dominant strategy equilibrium (if any). Show how you calculated the payoffs. Note: this is not a Hotelling location game; derive the payoffs as described above.

Explanation / Answer

Based on the market price of the underlying stock at the end of the contract. If price < strike price then payoff is 0. If price > strike price then payoff is price - strike price.

So payoff = Max (0, stock price - strike price)

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