Question

Consider two firms, A and B, that are deciding simultaneously which of two standards,

X and Y, to adopt.

a) Provide a game-table with pay-offs for the two firms that represents the siutation of

a standard war. That is write down the matrix and provide numbers for the pay-offs.

Then solve the game for its Nash Equilibria,

b) Do the same as in part a) for a situation that corresponds to a coordination game

where both firms prefer to have the same standard but both firms prefer standard

Y.

Answer 1

a) The Payoff Matrix is an expression of the First Law of Decision Science. Each row represents one action that the decision maker might or might not freely choose to perform; Each column represents a possible state of nature.

Nash equilibrium is a concept within game theory where the optimal outcome of a game is where there is no incentive to deviate from the initial strategy.

b) A coordination game is a type of simultaneous game found in game theory. It describes the situation where a player will earn a higher payoff when he selects the same course of action as another player.