Two firms are planning their marketing strategies.
Firm K can earn $12.5 million in profits from strategy S if firm L responds with strategy P, and $3.75 million in profit from S if L responds with strategy Q. Firm K can follow strategy T, which returns $8 million if firm L responds with strategy P and $2.5 million if L responds with strategy Q.
Firm L's potential profits would be $5 million and $9 million from strategy P, depending on whether firm K implements strategy S or T. Firm L's profits from strategy Q would be $7 million or $6 million depending on whether firm K follows strategy S or T.
a. Construct the payoff table.
b. Does either firm have a dominant strategy? Dominated? Is there a stable equilibrium?