There are two niches in the market for electronic sensors, one is SIZE (where smaller sensors are preferred) and the other is PERFORMANCE (where high performance sensors are preferred). Two firms, A and B, must simultaneously choose which niche to target their product to. The payoff matrix is shown below, where profits are listed in millions of dollars.
Company B
PERFORMANCE SIZE
Company A
PERFORMANCE A makes $3
B makes $2
A makes $10
B makes $3
SIZE A makes $4
B makes $4
A makes $11
B makes $2
a. Find all of the Nash equilibria, if any. Be sure to somehow demonstrate to me how you arrived at your answer (underline best responses in the table, explain the best responses verbally, etc.).
b. Now suppose Firm A has the opportunity to move first, choosing its niche before Firm B. Use a tree diagram to show which niche company A will choose.
c. How much would Firm A be willing to pay to B so that A could move first. The alternative is to keep playing the current game.
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