PROBLEM SET 3

1. Find the rollback equilibrium outcome and the complete equilibrium strategy for each player
in the following games:
a)

b)

c)
2. Consider a university campus, with only two banks operating on that campus, Yes Bank and
Axis Bank. Due to the busy teaching schedule of the students, suggestions have come from
students to open the bank on Sundays for a couple of hours in the morning. Suppose you are
the manager of Yes Bank, you have to decide whether to comply with or ignore the
suggestions. However, you can wait and see what the rival Axis Bank does before deciding
on what to do. If Axis Bank keeps its campus branch open on Sunday, but you enjoy the
Sunday holiday, then your profits are expected to fall by 100, whereas Axis Bank will see a
rise in profits by 150. On the other hand, if you work on Sundays and the rival Axis Bank
remains closed on Sunday, then your profits will increase by 150 and your rival’s profits will
fall by 100. However, if both the managers decide to keep their banks open on Sundays,
profits of both the banks will remain unaffected at the current level. Show the game in
extensive form and find if there is any subgame perfect equilibrium for this game.

3. Suppose the market for DVDs is dominated by two firms: Sony and Panasonic. Now, Sony
discovers a way to manufacture superior DVDs with much greater storage in smaller discs.
There is a sunk cost involved for Sony for adopting the new technology, which can then be
easily copied at half the cost by Panasonic. If Sony adopts the new disc technology but
Panasonic refrains from copying, then Sony would earn $40 million, while Panasonic would
earn nothing. If Sony does not adopt the new technology, then it will earn $10 million and
Panasonic will earn $4.
(a) Draw the game tree for this game in extensive form.
(b) At what profit value, will Panasonic not copy the new technology once Sony
introduces it?