Explain strategic bidding problem, Microeconomics

Two firms, A and B, are planning to bid for a contract of Motorway extension in Mauritius. Suppose: (1) firm B is a newly established company and has already incurred a start-up cost of $25 million; (2) A and B simultaneously choose to quote either a high or low price; (3) if both A and B quote the same price, the contract is awarded to A because it has been in the market for a long period of time; (4) if both firms submit a high price, A nets $300 million; (5) if both firms submit a low price, A nets $100 million; (6) if A prices high and B prices low, B nets $100 million (after the initial investment) and A nets $0.

(a) Construct the strategic-form game for the above strategic bidding problem.

(b) Explain the dominant strategy and the Nash equilibrium of the game.

(c) The government is the big winner in this case. Explain why.

Posted Date: 10/23/2013 4:03:18 AM | Location : United States







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