Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 3

Use the following payoff matrix for a one-shot game to answer the accompanying questions.

a. Determine the Nash equilibrium outcomes that arise if the players make decisions independently, simultaneously, and without any communication. Which of these outcomes would you consider most likely? Explain.
b. Suppose player 1 is permitted to "communicate" by uttering one syllable before the players simultaneously and independently make their decisions. What should player 1 utter, and what outcome do you think would occur as a result?
c. Suppose player 2 can choose its strategy before player 1, that player 1 observes player 2's choice before making her decision, and that this move structure is known by both players. What outcome would you expect? Explain.