Question

# Two outdoor equipment manufacturers are considering the production of a new product, a super-light tent. Both are

deciding whether to enter the market and produce the new tent. The payoff matrix is as shown. The implication of these payoffs is that the market demand is large enough to support only one manufacturer. If both firms enter, both will sustain a loss. Two firms move simultaneously.

a. Identify the all the pure strategy Nash equilibria of this game.

b. Suppose that Walkabout was an Australian firm and Go-lightly a New Zealand firm. Suppose the New Zealand Government decides to subsidise the New Zealand producer, Go-lightly, with a cheque for $25000 if it enters the market. Revise the payoff matrix to account for this subsidy.

c. What is the new equilibrium outcome?

d. Compare the two outcomes (pre- and post-subsidy). What effect does the subsidy have?