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.