Refer to the table of information about Go-Fast and Interweb again. What will be the likely outcome if the two firms act in a rivalrous (competitive) manner?

Question

BlackTom AI · Accepted Answer

Given the payoff numbers in the table (cooperation yields $50M each; unilateral deviation yields $70M for the deviator and $5M for the other; mutual competition yields $10M each), each firm has a dominant incentive to deviate from collusion. This is the core game-theory insight.

1) Relevant concepts
- Dominant strategy: a choice that gives a higher payoff regardless of the other player’s action.
- Nash equilibrium: a strategy profile where no player can do better by unilaterally changing their action.
- Prisoner’s dilemma/oligopoly logic: individual incentives to undercut lead to a worse outcome for both than collusion.

2) Step-by-step reasoning
- Consider Go-Fast’s choices given Interweb’s action:
  - If Interweb cooperates (colludes), Go-Fast gets $50M by cooperating but $70M by deviating → deviating is better (70 > 50).
  - If Interweb deviates (acts competitively), Go-Fast gets $5M by cooperating but $10M by deviating → deviating is better (10 > 5).
- Therefore deviating (choosing the competitive/rivalrous strategy) is a dominant strategy for Go-Fast.
- The same symmetric comparison applies to Interweb (the numbers are symmetric), so deviating is also dominant for Interweb.

3) Intermediate comparisons shown
- When opponent cooperates: 70 vs 50 → choose 70.
- When opponent deviates: 10 vs 5 → choose 10.

4) Why the correct answer is correct
Because both firms have the same dominant incentive to choose the competitive action, they will both choose it simultaneously. The outcome of both choosing the competitive strategy is the payoff pair ($10M, $10M).

5) Why other options are incorrect
- b and d (asymmetric 70/5 splits) describe unilateral deviation outcomes, not the stable mutual outcome when both act competitively.
- c (both $50M) is the collusive outcome, but it is not stable because each firm can earn $70M by unilaterally deviating.

6) Conclusion
Mutual competition (each firm playing its dominant deviation) leads to both earning $10 million each, confirming option a.

Refer to the table of information about Go-Fast and Interweb again. What will be the likely outcome if the two firms act in a rivalrous (competitive) manner?Single choice

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