As our arrows show, there is no Nash equilibrium in pure strategies. We look for a mixed strategy Nash eqilibrium.

   Suppose the US firm believes the German firm will randomly choose the body style of its car next year but that it will choose Style-1 with a .6 probability and Style-2 with a .4 probability. The expected payoffs for each for the US firm are: E(Style-1) = .6 x 20 + .4 x 5 = 12 + 2 = 14
E(Style-2) = .6 x 5 + .4 x 20 = 3 + 8 = 11
So the US would always use Style-1 since the expected payoff is higher. But if the German firm knew that it would always use Style-2, so this can't be an equilibrium.

Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved