Asked by Eveleen Zapata on Jul 27, 2024
Verified
Suppose AMD is considering cloning Intel's latest CPU chip.If AMD enters Intel's market, Intel can play Mean, expand its output, drop prices, and try to make AMD's profit as small as possible or play Nice by cutting back its output and sharing the market.AMD and Intel both know that after all moves are complete, the time-discounted profits of future chip production in billions of dollars are 
Assuming AMD moves first, which of the following is the Nash equilibrium for sequential play?
A) (In, Nice)
B) (In, Mean)
C) (Out, Nice)
D) (Out, Mean)
Nash Equilibrium
A concept within game theory where no participant can gain by changing strategies if the strategies of the others remain unchanged.
AMD
Advanced Micro Devices, Inc., an American multinational semiconductor company that develops computer processors and related technologies.
Intel
A multinational corporation and technology company known primarily for its semiconductor chips used in computer systems.
- Absorb the essentials of Nash equilibrium in the study of game theory.
- Gain an understanding of how game theory is applied in the context of competitive business maneuvers.
Verified Answer
ST
shania tantyoJul 29, 2024
Final Answer :
B
Explanation :
In this game, AMD is the first mover, and the outcome depends on whether AMD decides to enter the market (In) or stay out (Out). If AMD decides to enter the market, Intel can choose to play Nice or Mean, and if AMD stays out, the game ends with Intel being the sole producer in the market.
Let's analyze the payoffs for each possible outcome:
- (In, Nice): If AMD enters the market and Intel decides to play Nice, both companies will share the profits equally, and earn 5.5 billion dollars each.
- (In, Mean): If AMD enters the market and Intel decides to play Mean, Intel will expand its output, drop prices, and try to make AMD's profit as small as possible. In this case, Intel will earn 12 billion dollars, while AMD will earn only 1 billion dollars.
- (Out, Nice): If AMD stays out of the market, Intel will be the sole producer and earn the entire profits of 11 billion dollars.
- (Out, Mean): If AMD stays out of the market, there is no game to play.
To find the Nash equilibrium for sequential play, we need to start from the end of the game and work backwards. Clearly, (Out, Mean) is not a Nash equilibrium because there is no game to play. If AMD decides to stay out of the market, Intel will not have the opportunity to play Nice or Mean, and (Out, Nice) is not a Nash equilibrium since AMD can increase its payoff by entering the market.
On the other hand, if AMD decides to enter the market, Intel has to make a choice between playing Nice or Mean. In this case, the Nash equilibrium is (In, Mean). If Intel decides to play Nice, AMD has an incentive to defect and earn a higher payoff by expanding its output. Therefore, (In, Mean) is the only Nash equilibrium for this game.
Let's analyze the payoffs for each possible outcome:
- (In, Nice): If AMD enters the market and Intel decides to play Nice, both companies will share the profits equally, and earn 5.5 billion dollars each.
- (In, Mean): If AMD enters the market and Intel decides to play Mean, Intel will expand its output, drop prices, and try to make AMD's profit as small as possible. In this case, Intel will earn 12 billion dollars, while AMD will earn only 1 billion dollars.
- (Out, Nice): If AMD stays out of the market, Intel will be the sole producer and earn the entire profits of 11 billion dollars.
- (Out, Mean): If AMD stays out of the market, there is no game to play.
To find the Nash equilibrium for sequential play, we need to start from the end of the game and work backwards. Clearly, (Out, Mean) is not a Nash equilibrium because there is no game to play. If AMD decides to stay out of the market, Intel will not have the opportunity to play Nice or Mean, and (Out, Nice) is not a Nash equilibrium since AMD can increase its payoff by entering the market.
On the other hand, if AMD decides to enter the market, Intel has to make a choice between playing Nice or Mean. In this case, the Nash equilibrium is (In, Mean). If Intel decides to play Nice, AMD has an incentive to defect and earn a higher payoff by expanding its output. Therefore, (In, Mean) is the only Nash equilibrium for this game.
Learning Objectives
- Absorb the essentials of Nash equilibrium in the study of game theory.
- Gain an understanding of how game theory is applied in the context of competitive business maneuvers.