1. The publishing industry in the country of Font, where the local currency is the stet, is dominated by two companies, the Arial Book Co. and Verdana Works Ltd.. Currently, both of these companies rely on the sales of paper books to earn profits.
Recent trade figures published by the central government of Font have shown that there are an increasing number of ereaders being imported into Font. Owners of these ereaders then import ebooks from the neighbouring country of Calibri. The management of both Arial and Verdana are now considering the publishing of ebooks.
Arial has determined that if they start publishing ebooks they will make a profit of 6 million stets per year if Verdana does not publish ebooks and 5 million stets per year if Verdana does publish ebooks. If they do not go into the ebook market, Arial feels that they will still make a profit of 1 million stets per year if Verdana does publish ebooks and a profit of 2 million stets per year if Verdana does not publish ebooks.
Verdana, on the other hand, has estimated that if they start to publish ebooks, they will make a profit of 4 million stets if Ariel does not publish ebooks and 3 million stets if Ariel does publish ebooks. If they do not go into the ebook market, Verdana feels that they will make a profit of 1 million stets per year if Arial does publish ebooks and a profit of 1.5 million ebooks if Arial does not publish ebooks.
a. Complete the payoff matrix below.


Arial Book Co.



Publish ebooks

Not publish ebooks

Verdana Works Ltd.

Publish ebooks

Arial ______ stets
Verdana ____stets

Arial _____ stets
Verdana ____stets


Not publish ebooks

Arial ______ stets
Verdana ____stets

Arial ______ stets
Verdana ____stets

b. Which strategy will Arial Book Co. follow? Will they decide to publish ebooks, or not publish ebooks? Is this a dominant strategy? Explain briefly.
c. Which strategy will Verdana Works Ltd. follow? Will they decide to publish ebooks, or not publish ebooks? Is this a dominant strategy? Explain briefly.
d. What is the Nash equilibrium? Is this a prisoner's dilemma? Explain briefly.
A wellliked Fontian author, Bodini Cambria, has just been awarded a prestigious international literary honour. In the past, whenever a Fontian author has been awarded this honour, there has been a marked increase in the sales of that author's previous publications and the next book which is published has always had higher sales than any of the author's previous works. This year, Ms. Cambria has a new book ready for publication but she is insisting that it be published by a publishing house which only publishes paper books, not ebooks. In the past, Ms. Cambria has had books published by both Arial and Verdana. Arial and Verdana have both estimated that whichever publishing house negotiates the publishing rights to Ms. Cambria's new book will gain an additional 3 million stets in the coming year. Ms. Cambria realises that this is probably the last book which she will write in her career, so is prepared to share the benefits from its publication between Arial and Verdana if neither of them publish ebooks.
e. Using this new information, complete the payoff matrix below.


Arial Book Co.



Publish ebooks

Not publish ebooks

Verdana Works Ltd.

Publish ebooks

Arial ______ stets
Verdana ____stets

Arial _____ stets
Verdana ____stets


Not publish ebooks

Arial ______ stets
Verdana ____stets

Arial _____ stets
Verdana ___stets

f. With this new information, which strategy will Arial Book Co. follow? Will they decide to publish ebooks, or not publish ebooks? Is this a dominant strategy? Explain briefly.
g. With this new information, which strategy will Verdana Works Ltd. follow? Will they decide to publish ebooks, or not publish ebooks? Is this a dominant strategy? Explain briefly.