Two firms compete in a declining industry. Each firm has three possible choices: 1) exit the industry immediately (and gets a payoff of 0); 2) exit at the end of this quarter; 3) exit at the end of next quarter. Each quarter, if both firms are operating, each incurs a payoff of - 1; if a firm operates alone, it yields a payoff of 2.

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Business

Alice Trevino

26 January, 02:09

Two firms compete in a declining industry. Each firm has three possible choices: 1) exit the industry immediately (and gets a payoff of 0); 2) exit at the end of this quarter; 3) exit at the end of next quarter. Each quarter, if both firms are operating, each incurs a payoff of - 1; if a firm operates alone, it yields a payoff of 2.

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Mason · Answer 1

If one of the decides to exit, then its payoff will be 0. Each quarter the two firms operate incur each a loss which is - 1, and any quarter that one of the firm operates alone yields it a payoff of 2. For instance, if firm 1 decide to leave by the end of this current quarter while firm 2 decide to leave by the end of the next quarter, then the payoffs will be (-1, 1). This is so because each firms lose - 1 in the first quarter and firm 2 gains 2 in the next quarter. Also. Since the payoff for the two firm is the addition of its quarterly payoffs, the payoff to second firm (firm 2) will be 2 - 1 = 1. Also, suppose first firm (firm 1) chooses to leave immediately after the first quarter and the second (firm 2) continues to operate for two quarters, the outcome is (0, 4).