Reference no: EM132593000

Suppose that there are two firms, A and B, which have joined together to take advantage of a business opportunity. Each firm is called on to make an investment in an asset that is entirely worthless outside of the joint venture. To keep matters simple, suppose that the project requires that each party make an initial investment of $2 each, and the gross return from the investment is 8; yielding a net benefit of $4. Suppose that the division of the gross benefits between the two firms can be affected by costly actions that each takes. Specifically, suppose the possible actions are "grab" or "don't grab," where grabbing costs 3. Assume that when both firms choose "grab" they split the gross return. Further, if both firms choose "don't grab" they also split the gross returns. Finally, assume that grabbing works fully - so that the firm that grabs gets the entire gross return. Please draw out a payoff matrix for this game and discuss its outcome. What type of game is this? Explain