a) Following is payoffs matrix:-
Above payoffs matrix shows the various outcomes of different strategies of two firms.
b) In the absence of a binding and enforceable agreement, dominant strategy for AMC is 'Not Abide'. Profit of AMC is $30 million if it both firms adopt the strategy of 'Abide'. But this is the case of prisoner dilemma where firms do not have trust in each other and they do not comply with the agreement. AMC also developed the mistrust that SAMI is most probably going to adopt the strategy of 'Not Abide'. Profit of AMC would come down to the $10 million if it goes with strategy of 'Abide and rival SAMI cheats by not abiding by the agreement.
c) Same logic can be applied in case of SAMI. SAMI dominant strategy is also 'Not to Abide'. SAMI does not have faith in AMC as the AMC is likely to cheat in this game.
d) Both firms cheat each other in the absence of any binding and enforceable agreement. Cheating by both firms leads to the lowering down of profit to down. Profit is lower when both firms not abide by the agreement. In the enforceable agreement, both firms would adopt the strategy of 'Abide' and maximize profits.
Following is the payoffs matrix for Nike and Adidas:
The above payoff matrix shows different outcomes of strategies of Light Ads and Heavy Ads. The adoption of the strategy of Light ads would maximize the profits of both firms. Both firms must adopt the Light Ads or Heavy Ads. Profit is maximized at Light Ads. If one firm goes with the strategy of Heavy Ads other firms must follow the same. Varied strategies by both firms would land both in lower level of profit. Hence, Light-Light Ads or Heavy-Heavy Ads are Nash equilibrium for both firms.
The analysis and the strategies equilibrium outcome differ in Exercise 4 if the firm AA D enjoys a cost advantage of $35 per hour. Both firms have almost same cost level and there would not be any benefit if both unnecessary involve in the competition. Hence, the both would place the bid equal to $150 per hour. It does make any difference who takes the initial step.