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# Game Theory: A firm and its supplier are going to negotiate a deal. Since the supplier's cost is

\$10 million per quarter and the value to the firm is \$13 million per quarter, there is \$3 million per quarter to split between the two. However, they can each hire a negotiation consultant for \$500,000 per negotiation. If neither hires the consultant, each expects to get half of the \$3 million pot. If only one hires the consultant, it expects to get three-fourths of the pot minus the consultant costs, leaving the other firm to gain 0 (and incur in 0 cost as well). If they both hire consultants, their consultants suggest additional expenditures that erases the potential gain of \$3, leaving the firm and the supplier with the cost of hiring the consultants.

What is the equilibrium of this simultaneous move game (Hint: set up the 2x2 table and fill in the pay-off values in the cells, then determine the Dominant Strategies and Nash Equilibrium)? Explain your reasoning.

There are two Nash equilibrium,... View the full answer

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