Answer to Question #71298 in Microeconomics for GAGANDEEP deep SINGH

Question

Two firms, VolgaBus and GMB, are competing to sell 100 buses to MetroTravel, a cityowned
bus company. They each submit a sealed bid to get the contract, with the contract
going to the lowest bid. Each firm has the option of submitting a low-price bid of $15 000
per bus, or a high-price bid of $20 000 per bus. In the event of a tie, the city will buy 50
buses from each firm.
a. Draw a payoff matrix for this simultaneous game. (4 marks)
b. Based on your matrix from part a., what will the Nash equilibrium be? Explain in detail
how you arrived at your answer. (4 marks)

Answer 1

Two firms, VolgaBus and GMB, are competing to sell 100 buses to MetroTravel.
Each firm has the option of submitting a low-price bid of $15 000 per bus, or a high-price bid of $20 000 per bus. In the event of a tie, the city will buy 50 buses from each firm.
a. If one firm win the contract with low-price bid, it will receive 100*$15,000 = $1,500,000, another firm will receive $0.
In the event of a tie at low-price bid each firm will receive 50*$15,000 = $750,000.
In the event of a tie at high-price bid each firm will receive 50*$20,000 = $1,000,000.
So, a payoff matrix for this simultaneous game is:
VolgaBus\GMB Low-price bid High-price bid
Low-price bid $750,000\$750,000 $1,500,000\$0
High-price bid $0\$1,500,000 $1,000,000\$1,000,000
b. Based on our matrix from part a., the Nash equilibrium will be a tie at low-price bid, so each firm will receive 50*$15,000 = $750,000, because both firms will choose a low-price strategy to win a contract.