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, Mean)
B) (In, Nice)
C) (Out, Mean)
D) (Out, Nice)

Question

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, Mean) 
B) (In, Nice) 
C) (Out, Mean) 
D) (Out, Nice)

Quizplus · Accepted Answer

The Nash equilibrium for sequential play occurs when both companies choose their optimal strategy given the other company's strategy. If AMD enters the market, Intel's best response is to play Nice by cutting back its output and sharing the market. This allows both companies to earn a positive profit of $5 billion each. If AMD chooses not to enter the market, Intel's best response is to continue with its current output, earning a profit of $7 billion. Therefore, the Nash equilibrium is (In, Nice), where AMD enters the market and Intel plays Nice.

Suppose AMD Is Considering Cloning Intel's Latest CPU Chip