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Dominant Strategy
What is the optimal strategy for Firm B if Firm A
Both Individuals Confess
chooses to advertise?
(Nash Equilibrium)
If Firm B chooses to advertise, the payoff is 3. Individual B
Otherwise, the payoff is 1. The optimal strategy is to Confess Don't Confess
advertise. Individual A
Confess (5, 5) (0, 10)
Firm B Don't Confess (10, 0) (1, 1)
Advertise Don't Advertise
Advertise (4, 3) (5, 1) Application: Price Competition
Firm A
Don't Advertise (2, 5) (6, 2) Dominant Strategy: Low Price
Firm B
What is the optimal strategy for Firm B if Firm A Low Price High Price
chooses not to advertise? Low Price (2, 2) (5, 1)
Firm A
If Firm B chooses to advertise, the payoff is 5. High Price (1, 5) (3, 3)
Otherwise, the payoff is 2. Again, the optimal strategy is
to advertise. Application: Nonprice Competition
Firm B Dominant Strategy: Advertise
Advertise Don't Advertise Firm B
Advertise (4, 3) (5, 1) Advertise Don't Advertise
Firm A Advertise (2, 2) (5, 1)
Don't Advertise (2, 5) (6, 2) Firm A
Don't Advertise (1, 5) (3, 3)