The demand for cars is rising rapidly in Doggerland. Two rival car companies Sunbeam and Hillman are each considering building a new plant to supply the growing market. Each company is aware that the potential profitability of their new plant will depend in part on the decision made by their competitor. The choices facing each company are shown below, as are the potential profits from each decision
1. Use the information provided above to create a pay-off matrix to show the joint outcomes from the decisions made by the two companies. From the payoff matrix identify the Nash equilibrium and explain why this would be the outcome of the game.
2. Now use the same information to create a decision tree, assuming that Sunbeam will make their decision first. Analyse the resulting decision tree and explain the decision that will each company will make.
3. Compare and contrast the outcomes from the payoff matrix and the decision tree.
4. Assess the methods that are available to Sunbeam and Hillman to reduce the uncertainty around the decisions created by their interdependence?