Suppose two firms, Allstom from France, and Bombardier from Canada, are bidding on a contract to replace train cars for the subway system in Mexico City. If they bid the same amount, they share the contract-otherwise, the low bid wins. The figure below shows the payoff matrix for this contest.
FIGURE 11-6
Refer to Figure 11-6. What is the Nash equilibrium in this bidding contest between Allstom and Bombardier?
◦ The two firms will co-operate and maximize their joint profits at $10 million each.
◦ Each firm will bid the high price, expecting a larger total profit.
◦ Each firm will bid the low price, and each will earn a profit of $2.5 million.
◦ There is no Nash equilibrium in this bidding contest, because each firm can expect to earn at least $5 million.
◦ both A and C are Nash equilibria.
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