Two firms, B and A, are located in the countries of Amerigo and Europa, respectively. Both are considering whether or not to enter the airplane market. However, the world market for airplanes can only support one profitable entrant. If both B and A enter the airplane market, they will each suffer a loss of $10 million. If one firm enters the airplane market, and the other does not, the entrant earns a profit of $200 million, while the other firm earns a profit of 0. If neither firm enters the market, both firms earn a profit of 0.
a. Write down a standard matrix (the game in "normal form," as we saw in class) of profits for B and A for all possible combinations of strategies (entrance decisions) by the two.
b. In words, explain the optimal strategy of each firm in response to each possible move of its opponent. Can we make a prediction about what the outcome of this "game" will be? If so, what is the outcome? If not, why not? Explain your answer.
Now the government of Europa publicly announces that it will subsidize A by $15 million if it enters the market, raising its profits by an equal amount.
c. Write down the new game matrix showing payoffs to each strategy combination.
d. Is there a clear outcome of this game? If so, what is the outcome? If not, why not? Explain your answer.