If Firm 1 is unsure about what Firm 2
will do but can assign probabilities to each feasible action for Firm 2, it could instead
use a strategy that maximizes its expected payoff. Suppose, for example, that Firm
1 thinks that there is only a 10-percent chance that Firm 2 will not invest. In that
case, Firm 1’s expected payoff from investing is (.1)(100) + (.9)(20) = $8 million.
Its expected payoff if it doesn’t invest is (.1)(0) + (.9)(10) = $9 million. In this
case, Firm 1 should invest.
O
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