QUESTION 1 Suppose that two firms are creating a joint venture which provides a coalitional payoff of 20 in profits. They bargain over the division of the surplus, with firm 1 as the first proposer and a discount rate of 50%, and where firm 1 has an outside option worth 2 and firm 2 has an outside option worth 6. In the subgame perfect Nash equilibrium of this game, how is the profit of the JV divided among the two firms and why? How does this outcome compare with the Nash Bargaining Solution and why? How do the structure and predictions of these models differ from more complex real-world bargaining situations within and between firms?

QUESTION 2 Suppose that a multinational firm (M) and a local partner (L) is collaborating to bring M’s products to L’s market. Each year, M can invest in adapting its technologies and L in adapting its marketing to the relationship. They share the profits using Nash bargaining, and the annual payoffs to the two firms with different combinations of investments is shown in the payoff matrix to the right. What is the one-shot Nash Equilibrium of this game? If both firms pursue trigger strategies and they have an infinite time horizon and a discount rate of 40%, what can we predict will happen? What could the two firms do to solve the problem?

 

L/M	invest	don't
invest	3 7	6 0
don't	-1 9	2 2