26 Jul EXPLAIN THE GAME THAT IS WHO THE PLAYERS ARE WHAT ARE THEIR STRATEGIES AND WHAT IS THEIR RETURN?
In a country a lot of people have been suffering from severe and a very annoying itch on their legs Show more In a country a lot of people have been suffering from severe and a very annoying itch on their legs in the winter. It is unknown why but the firm Itchy-Fighter (IF) are currently working on a medicinal pill that can remove the itch once and for all. Because of this IF are expecting to only be able to sell the pills for the next 2 years which we will call Year 1 and Year 2. The total income from the pills in the 2 years are 1200 million. IF can by using intensive research develop the pill faster making the income from the pill largest in Year 1 and less in Year 2. The cost for IF for the intensive research will be 650 million. IF can also use regular research to develop the pill but it is slower so most of the income will be in Year 2. The cost for regular research will only be 300 million. Below you will see these numbers where the income is based on IF being the only firm in the market for leg-itches. Year 1 Year 2 IF income with intensive research 900 million 300 million IF income with regular research 300 million 900 million IF development cost with intensive research 650 million IF development cost with regular research 300 million The fact that a competing firm LegSpray (LS) is coming with a competing product to IFs pill complicates the above incomes. This product will hit the market in Year 2 and if it is introduced to the market it will take half of IFs income in Year 2. If LS develops and introduces the product it will cost LS 200 million. These costs are however not a factor if the firm decides not to introduce the product. It is so that both firms can observe everything that happens and both firms know all the economic implications of each other in the form of the figures mentioned earlier. Finally IF has to choose to select research level before LS decides whether to introduce or not and LS observes as mentioned the research level of IF. Disregard discounting of income and costs between Year 1 and Year 2. The above-mentioned scenario can be perceived as a game. a) Explain the game that is who the players are what are their strategies and what is their return? b) Explain the game on extensive form ie draw or describe carefully the move-tree and by using backward induction (roll-back analysis) find a Nash equilibrium for the game. Is this a perfect Nash equilibrium? (You do not have to draw the game tree you can describe it with knots branches and returns etc.) c) Show the game using tables. d) How many and which Nash Equilibria does the game have in pure strategies and what significant difference is there between the found Nash equilibria? e) Explain the strategic situation and the outcome if LS has the opportunity to credibly announce a market launch of their product before IF chooses their research level. Show less
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