Consider the following sequential game between firm 1 and firm 2. First, firm 1 decides to either adopt an aggressive marketing strategy or not. Second, Firm 2 observes firm 1’s decision and then also decides between its own aggressive strategy, a passive strategy or whether to leave the market altogether. The profits (in millions of dollars) of the firms are as follows: If both adopt an aggressive strategy, then firm 1’s payoff is $14 and firm 2’s is -$1. If firm 1 adopts an aggressive strategy and firm 2 does not, then the payoff for firm 1 is $19 and for firm 2 is -$5. If firm 1 does nothing and firm 2 adopts an aggressive strategy, firm 1’s payoff is $10 and firm 2’s is $9. If both do nothing, then firm 1 makes $20 in profits and firm 2 makes $5. Finally, if firm 2 leaves the market altogether, it makes $0 and firm 1 makes $20 with an aggressive strategy and $24 without one. Using the principle of backward induction, the most reasonable prediction is… that firm 1 adopts an aggressive strategy and firm 2 exits the market. that firm 1 adopts a passive strategy and firm 2 exits the market. that both firms adopt a passive strategy. that firm 1 adopts a passive strategy and firm 2 adopts an aggressive strategy
Consider the following sequential game between firm 1 and firm 2. First, firm 1
decides to either adopt an aggressive marketing strategy or not. Second, Firm 2 observes firm 1’s decision and then also decides between its own aggressive strategy, a passive strategy or whether to leave the market altogether. The profits (in millions of dollars) of the firms are as follows: If both adopt an aggressive strategy, then firm 1’s payoff is $14 and firm 2’s is -$1. If firm 1 adopts an aggressive strategy and firm 2 does not, then the payoff for firm 1 is $19 and for firm 2 is -$5. If firm 1 does nothing and firm 2 adopts an aggressive strategy, firm 1’s payoff is $10 and firm 2’s is $9. If both do nothing, then firm 1 makes $20 in profits and firm 2 makes $5. Finally, if firm 2 leaves the market altogether, it makes $0 and firm 1 makes $20 with an aggressive strategy and $24 without one. Using the principle of backward induction, the most reasonable prediction is…
that firm 1 adopts an aggressive strategy and firm 2 exits the market.
that firm 1 adopts a passive strategy and firm 2 exits the market.
that both firms adopt a passive strategy.
that firm 1 adopts a passive strategy and firm 2 adopts an aggressive strategy
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