EconS491_Recitation5_Spring2011

Ifcompany1developsanapplicationthenitspayoffis2while

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: elop Do not develop 0, 0 This has two Nash equilibria: (develop, develop) and (do not develop, do not develop). 9 • Move up the tree to the subgame initiated by IBM having developed OS/2, where company 1 has to decide whether or not to develop an application. Suppose that the Nash equilibrium for the subgame in which company 1 does not develop an application is (develop, develop). Replacing the two final subgames with the Nash equilibrium payoffs, the situation is as depicted in the tree below. If company 1 develops an application, then its payoff is 2, while its payoff is 0 from not doing so. Hence, it chooses develop. Do not develop OS/2 IBM Company 1 Company 2 Company 3 0 0 0 0 IBM Develop OS/2 Company 1 Develop Do not develop 5 2 2 2 3 0 1 1 1 0 • Now suppose the Nash equilibrium when company 1 does not develop an application is (do not develop, do not develop). Replacing the two final subgames with the Nash equilibrium payoffs, the situation is as depicted in the following figure. If company 1 develops an application, then its payoff is 2, while its payoff is 0 from not doing so. Hence, it chooses develop. Thus, regardless of which Nash equilibrium is used in the subgame in which company 1 chooses do not develop, company 1 optimally chooses develop. • Now we go to the subgame that is th...
View Full Document

Ask a homework question - tutors are online