Two Firms in a Local Market Compete in the Manufacture

question 66

Essay

Two firms in a local market compete in the manufacture of cyberwidgets. Each firm must decide if it will offer a warranty or not. The payoffs of each firm's strategy are a function of their competitor as well. The payoff matrix is presented below. If firm #1 announces they will offer a warranty regardless of what firm #2 does, is this a credible threat? Why or why not?

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Definitions:

Sunk Costs

Expenses that have already been incurred and cannot be recovered, which should not affect future decision-making but often do.

Faulty Hindsight

The misjudgment of the reasons behind past decisions based on the outcome rather than on the information available at the time.

Sunk Costs

Costs that have already been incurred and cannot be recovered, which should not influence future business or personal decisions.

Escalated Commitment

A pattern of behavior in which an individual or group continues to rationalize their decisions, invest additional resources, and follow a failing course of action.