How Historical Precedent Can Lead to a Pareto-Inferior Nash Equilibrium

Technology Adoption Dilemma

Two firms are deciding whether to adopt a new industry-wide software standard ('New') or continue using the old one ('Old'). Their profits are interdependent, as shown in the payoff matrix below. The first number in each cell is the profit for Firm 1, and the second is for Firm 2.

Which outcome represents a Nash equilibrium that is also Pareto-inferior?

Coordination Failure in Technology Adoption

Coordination Failure in Environmental Policy

In a strategic interaction represented as a game, if the players find themselves in a Nash equilibrium where a different, mutually-beneficial outcome exists, it is always rational for any single player to unilaterally change their strategy to achieve that better outcome.

Two companies, Firm A and Firm B, are deciding whether to invest in a 'High' or 'Low' advertising budget. Their profits depend on the other firm's choice, as shown in the payoff matrix below. The first number in each cell is the profit for Firm A, and the second is for Firm B.

Match each strategic outcome to its correct game-theoretic description.

Consider a scenario where two firms can either adopt a 'New' technology or stick with an 'Old' one. If both adopt 'New', they each earn $100. If both stick with 'Old', they each earn $50. If one adopts 'New' while the other sticks with 'Old', the 'New' firm earns $20 and the 'Old' firm earns $120. The outcome where both firms stick with 'Old' is a stable ____, as neither firm can benefit by ____ switching its strategy. This outcome is also ____, because an alternative exists where both firms would be better off.

Two adjacent farms are deciding between using their current 'Old' irrigation system or investing in a 'New' shared system. The table below shows the annual profit for each farm (in thousands of dollars) based on their choices. The first number in each pair is Farm 1's profit, and the second is Farm 2's profit.

Assume both farms are currently using the 'Old' system. Arrange the following statements into a logical sequence that explains why the farms might fail to coordinate on the mutually beneficial 'New' system and instead remain with the 'Old' system.

Designing a Coordination Problem

Evaluating a Policy for International Cooperation

Why the Specialization Game is Not an Invisible Hand Game

Why the Specialization Game is Not an Invisible Hand Game