Two firms in a local market compete in the manufacture of cyberwidgets. Each firm must decide if it will offer a warranty or not. The payoffs of each firm's strategy are a function of their competitor as well. The payoff matrix is presented below. If firm #1 announces they will offer a warranty regardless of what firm #2 does, is this a credible threat? Why or why not?

Both firms offering a warranty and both firms offering no warranty are both Nash Equilibria for this game. Firm #1 prefers the Nash Equilibrium corresponding to both firms offering a warranty on their cyberwidgets. Firm #1's announcement is not a credible threat. Firm #1 actually can do better by not offering a warranty given firm #2 does not offer a warranty. Thus, it is in firm #1's best interest to not offer a warranty if firm #2 does not offer a warranty regardless of firm #1's announcement.