Assume that Hewlett-Packard (H-P) and Dell Computer have a large inventory of personal computers that they would like to sell before a new generation of faster, cheaper machines is introduced. Assume that the question facing each competitor is whether or not they should widely advertise a “close out” sale on these discontinued items, or instead let excess inventory work itself off over the next few months. If both aggressively promote their products with a nationwide advertising campaign, each will earn profits of $5 million. If one advertises while the other does not, the firm that advertises will earn $20 million, while the one that does not advertise will earn $2 million. If neither advertises, both will earn $10 million. Assume this is a one-shot game, and both firms seek to maximize profits.

A. What is the dominant strategy for each firm? Are these also secure strategies?
B. What is the Nash equilibrium?
C. Would collusion work in thiscase?

  • CreatedFebruary 13, 2015
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