The payoffs to each firm are listed on the following diagram and an extensive form the game among Shell and BP. Shell has 16% market share and BP has 20% of the U.S. gasoline market share. BP and Shell are attempting to determine whether to send geologists to explore Oil Track 50.
1. Calculate the Nash equilibrium in this game?
2. Calculate the Nash equilibrium that satisfies backward induction.
3. Suppose you are called in to advise BP on whether they should pursue a merger with Shell in which case they could coordinate their actions. Determine your advice to BP?