Question

Suppose Toyota and Honda must decide whether to make a new breed of side-impact airbags standard equipment on all models. Side-impact airbags raise the price of each automobile by \($\mathbf{1000}$. If both firms make side-impact airbags standard equipment, each company will earn profits of \)$\mathbf{2}\mathbf{.}\mathbf{5}$billion. If neither company adopts the side-impact airbag technology, each company will earn$\mathbf{1}$billion (due to lost sales to other automakers). If one company adopts the technology as standard equipment and the other does not, the adopting company will earn a profit of \(role="math" localid="1657018879671" $3$billion and the other company will lose \)$\mathbf{1}\mathbf{.}\mathbf{5}$billion. If you were a decision maker at Honda, would you make side-impact airbags standard equipment? Explain.

Short answer

The dominant strategy on the part of the Honda team will be to implement the Airbags in their models. Otherwise one of the Nash equilibrium will be generated in which Toyota and Honda do not use the Airbags and obtain a lower benefit of 1 billion dollars

Step-by-step solution

Introduction 

Toyota and Honda must decide whether implementing side-impact airbags for all of their standard vehicles will increase the cost of production by $.$1000$ However, depending on the decision made by each manufacturer, you will obtain different profits measured in billions of dollars.

Deciding side-impact airbags standard equipment 

The following matrix shows the possible profits obtained by Honda and Toyota depending on the strategy they adopt.

If we belong to the Honda decision, we must make the decision of whether or not to produce side-airbags in our vehicles in which Toyota makes the first decision.

If Toyota decides to implement the Airbags in its vehicles, it will be convenient for us as members of Honda to implement the Airbags as well. If we do not do them we will obtain losses of $1.5$ billion.

If Toyota decides not to implement its Airbags in its vehicles, it will be convenient for Honda to implement the Airbags in its vehicles and in which we will obtain a profit of 3 billion dollars instead 1 billion if we do not implement the Airbags.

Therefore, the dominant strategy on the part of the Honda team will be to implement the Airbags in their models. Otherwise one of the Nash equilibrium will be generated in which Toyota and Honda do not use the Airbags and obtain a lower benefit of 1 billion dollars.