Reference no: EM132632245

Game theory - hypothetical case analysis:

In a shopping mall in the city, there are two most dominant brands of sports clothes and gears: New City and Times Good. There are no other sportwear products supplied/sold in the mall. In effect, the market in the mall can be described as an oligopoly. Each brand makes an economic profit of about $15,000 a year.

One day, the owner of New City hears rumors that Times Good may soon be adding new designs for the summer sportwear. New City owner figures that if she does nothing, she would lose many customers to Times Good; Times Good would make a profit of $20,000 and she will suffer an economic loss of $2,000 a year. If she develops the similar new summer sportwear designs in her products, but Times Good doesn't, the result will be the other way around. However, if she matches her rival's move, both firms will retain their share of the market but the cost of the new product development will reduce each firm's profit to $10,000 a year.

• Construct the game matrix. Clearly define the players, possible actions of the players, and the according payoffs.
• If each firm pursues their self-own interest, what is the most likely strategy each of them will follow? Explain.
• What is the Nash Equilibrium of this game?
• If two firms seek for mutual interests, what is the best strategy for both of them to be better-off? What is the Pareto Optimum of the game?