Question: A Burger King and Wendy’s are located on opposite corners of a downtown intersection. The two franchises compete on the basis of the price for their hamburger, French fry, and soda combination meals.

First, assume that Burger King and Wendy’s choose their prices simultaneously. The firms' profits arc displayed in the following payoff table.

a. Does Wendy’s have a dominant strategy? If yes, what?

b. Does Burger King have a dominant strategy? If yes, what?

c. What is the Nash equilibrium?

d. Now, assume that Wendy’s chooses its price first. Draw the game tree.

e. Can Burger King credibly threaten to punish Wendy’s with a retaliatory price cut if Wendy’s chooses a low price? Why?

f. What is the Nash equilibrium?

g. Now, assume that Burger King chooses its price first. Draw the game tree.

h. Can Wendy’s credibly promise Burger King that it (Wendy’s) will choose a high price if Burger King also chooses a high price? Why?

i. What is the Nash equilibrium?

j. Is there a first-mover advantage? If yes, what firm(s) and why?

k. Is there a second-mover advantage? If yes, what firm(s) and why?