Two firms are planning their marketing strategies.
Firm K can earn $25 million in profits from strategy S if firm L responds with strategy P, and $7.5 million in profit from S if L responds with strategy Q. Firm K can follow strategy T, which returns $16 million if firm L responds with strategy P and $5 million if L responds with strategy Q.
Firm Ls potential profits would be $12 million and $19 million from strategy P, depending on whether firm K implements strategy S or T. Firm Ls profits from strategy Q would be $16 million or $11 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?