Consider the following simple two player game: The Buyer has the value from the contract of 30. The Seller has the Cost of completing the contract of 10. The buyer is deciding whether to offer the Seller a Price of 20 or 11. After the contract has been awarded, there is a 50% chance of a crisis. It costs the seller 5 to fix the crisis and it costs the Buyer 15 to fix the crisis. Consider the following simple two player game: The Buyer has the value from the contract of 30. The Seller has the Cost of completing the contract of 10. The buyer is deciding whether to offer the Seller a Price of 20 or 11. After the contract has been awarded, there is a 50% chance of a crisis. It costs the seller 5 to fix the crisis and it costs the Buyer 15 to fix the crisis.
1. Assume the game is single shot (in other words, the Buyer and the Seller will not deal with one another ever again). Also assume that the Buyer and the Seller cannot make an arrangement contingent on whether the crisis happens or not. Analyze this game (Players, Options, Information, Motives) and derive the equilibrium outcome (in equilibrium, what will be the price and what will the seller do if there is a crisis).
2.How would your conclusions change if the Buyer and the Seller had to deal with one another repeatedly?
3. How would you conclusion change if there were two Sellers competing for the contract. If you need to make additional assumptions, state them clearly.