Reference no: EM132021174

Declining Industry: Consider two competing firms in a declining industry that cannot support both firms profitably. Each firm has three possible choices as it must decide whether or not to exit the industry immediately, at the end of this quarter, or at the end of the next quarter. If a firm chooses to exit then its payoff is 0 from that point onward. Every quarter that both firms operate yields each a loss equal to -1, and each quarter that a firm operates alone yields a payoff of 2. For example, if firm 1 plans to exit at the end of this quarter while firm 2 plans to exit at the end of the next quarter then the payoffs are (-1,1) because both firms lose -1 in the first quarter and firm 2 gains 2 in the second. The payoff for each firm is the sum of its quarterly payoffs.

The answer points out that "there is no strictly dominated strategies but there is a weakly dominated one, which is T". What does it mean? How do we get that? How can we calculate the probability for each outcome?