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Set up a payoff matrix that fits the situation

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Consider two strategically dependent firms in an oligopolistic industry, Firm A and Firm B. Firm A knows that if it offers extended warranties on its products but Firm B does not, it will earn $6 million in profits, and Firm B will earn $2 million. Likewise, Firm B knows that if it offers extended warranties but Firm A does not, it will earn $6 million in profits, and Firm A will earn $2 million. The two firms know that if they both offer extended warranties on their products, each will earn $3 million in profits. Finally, the two firms know that if neither offers extended warranties, each will earn $5 million in profits. (See pages 605-606.)

a. Set up a payoff matrix that fits the situation faced by these two firms.

b. What is the dominant strategy for each firm in this situation? Explain.

Reference no: EM131177209

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