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 e-readers being imported into Font. Owners of these e-readers then import e-books from the neighbouring country of Calibri. The management of both Arial and Verdana are now considering the publishing of e-books.

Arial has determined that if they start publishing e-books they will make a profit of 6 million stets per year if Verdana does not publish e-books and 5 million stets per year if Verdana does publish e-books. If they do not go into the e-book market, Arial feels that they will still make a profit of 1 million stets per year if Verdana does publish e-books and a profit of 2 million stets per year if Verdana does not publish e-books.

Verdana, on the other hand, has estimated that if they start to publish e-books, they will make a profit of 4 million stets if Ariel does not publish e-books and 3 million stets if Ariel does publish e-books. If they do not go into the e-book market, Verdana feels that they will make a profit of 1 million stets per year if Arial does publish e-books and a profit of 1.5 million e-books if Arial does not publish e-books.

a. Complete the payoff matrix below.

b. Which strategy will Arial Book Co. follow? Will they decide to publish e-books, or not publish e-books? Is this a dominant strategy? Explain briefly.

c. Which strategy will Verdana Works Ltd. follow? Will they decide to publish e-books, or not publish e-books? Is this a dominant strategy? Explain briefly.

d. What is the Nash equilibrium? Is this a prisoner's dilemma? Explain briefly.

A well-liked 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 e-books. 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 e-books.

e. Using this new information, complete the payoff matrix below.

f. With this new information, which strategy will Arial Book Co. follow? Will they decide to publish e-books, or not publish e-books? Is this a dominant strategy? Explain briefly.

g. With this new information, which strategy will Verdana Works Ltd. follow? Will they decide to publish e-books, or not publish e-books? Is this a dominant strategy? Explain briefly.