(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 519
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494 PART 3 • Market Structure and Competitive Strategy
Ocean
0
200 yards
A
Y
C
Beach
Figure 13.1
BEACH LOCATION GAME
You (Y) and a competitor (C) plan to sell soft drinks on a beach. If sunbathers are spread
evenly across the beach and will walk to the closest vendor, the two of you will locate next
to each other at the center of the beach. This is the only Nash equilibrium. If your competitor located at point A, you would want to move until you were just to the left, where
you could capture three-fourths of all sales. But your competitor would then want to move
back to the center, and you would do the same.
The “beach location game” can help us understand a variety of phenomena. Have you ever noticed how, along a two- or three-mile stretch of road,
two or three gas stations or several car dealerships will be located close to each
other? Likewise, as a U.S. presidential election approaches, the Democratic and
Republican candidates typically move close to the center as they define their
political positions.
Maximin Strategies
The concept of a Nash equilibrium relies heavily on individual rationality. Each
player’s choice of strategy depends not only on its own rationality, but also
on the rationality of its opponent. This can be a limitation, as the example in
Table 13.4 shows.
In this game, two firms compete in selling file-encryption software. Because
both firms use the same encryption standard, files encrypted by one firm’s software can be read by the other’s—an advantage for consumers. Nonetheless,
Firm 1 has a much larger market share. (It entered the market earlier and its software has a better user interface.) Both firms are now considering an investment
in a new encryption standard.
Note that investing is a dominant strategy for Firm 2 because by doing so it
will do better regardless of what Firm 1 does. Thus Firm 1 should expect Firm
2 to invest. In this case, Firm 1 would also do better by investing (and earning
TABLE 13.4
MAXIMIN STRATEGY
Firm 2
Don’t invest
Firm 1
Don’t invest
Invest
Invest
0, 0
؊10, 10
؊100, 0
20, 10
