Note that the upper right-hand corner of the payoff matrix is also a Nash
equilibrium, which might occur if Firm 1 indicated that it was about to produce
the crispy cereal. Each Nash equilibrium is stable because once the strategies are
chosen, no player will unilaterally deviate from them. However, without more
information, we have no way of knowing which equilibrium (crispy/sweet vs.
sweet/crispy) is likely to result—or if either will result. Of course, both firms
have a strong incentive to reach one of the two Nash equilibria—if they both
introduce the same type of cereal, they will both lose money. The fact that the
two firms are not allowed to collude does not mean that they will not reach
a Nash equilibrium. As an industry develops, understandings often evolve as
firms “signal” each other about the paths the industry is to take.