Question

Apply normal form and extensive form representations of games to formulate decisions in strategic environments that include pricing, advertising, coordination, bargaining, innovation, product quality, monitoring employees, and entry.

Short answer

Normal and Extensive forms of games formulate the strategic environments through Nash equilibrium, one-shot game and sequential bargaining.

Step-by-step solution

Definition of Normal Form Game

It is the representation of a game showing possible strategies and payoffs that resulted from alternative strategies to the players.

Formulation of strategic environments under Normal form game

Firm B

Firm A

Price	Sale price	Regular price
Sale price	$2, $2	$4, $7
Regular price	$7, $4	$4, $4

Here, the value in the cell represents the units of profits each firm gets on implementing sale price and regular price. If Firm B chooses sale price, then Firm A will always choose sale price as well which will lead Firm A and Firm B to receive $2 million each. On the other hand, if Firm B chooses regular price then Firm A will also choose regular price, as a result both will receive $4 million each. Hence, this game has two Nash equilibrium conditions.

Advertising and Quality Decisions

Kellogg

Rival

Strategy	Advertise	Don’t Advertise
Advertise	$0, $0	$-4, $52
Don’t Advertise	$52, $-4	$12, $12

Here, it can be seen that if Kellogg chooses to advertise and its rival reacting to such will choose to advertise as for rival the better pay-off is $0 than $-4. Hence, they will both receive $0. This condition is termed as prisoner’s dilemma when both the firms have no coordination. Thus, both the firms on trying to maximize their profits would choose to advertise, for both of the firms receiving $0 as their profits.

Coordination

Rival Kellogg

Strategy	Advertise	Don’t Advertise
Advertise	$0, $0	$-4, $52
Don’t Advertise	$52, $-4	$12, $12

Here, if both Kellogg and rival firm chooses to coordinate between themselves, they will decide not to advertise and both will receive $12 million as profits. Hence, coordination is profitable for both the firms.

Definition of Extensive Form Game

The game represents the game that summarizes the players, and the information that is available to them in every stage of the game including the strategies availability, sequential moves and payoffs.

Formulation of strategic environments under Extensive Form game

Here, through sequential bargaining, the rival decides their decision based on the decision made by the leader firm. If Kellogg chooses to be hard on the rival firm and chooses to advertise, then the rival will choose to advertise as not receiving anything is better than losing $4 million. Hence, both firms will receive $0 million dollars each. Thus, Kellogg will choose not to advertise. If both the firms coordinate then, both will receive $12 million profit each.