Two competing hospitals in small city can choose whether to offer only basic health care, all-
purpose care, or specialized care. The following payoff table denotes profits for each
hospital:
Hospital B's Services
Hospital A's
Services
Basic
All-Purpose
Specialty
Basic 5, 7 9, 8
6, 10
All-Purpose
5, 4 4, 7
6, 12
Specialty
13, 6
7, 4 3, 3
a) Does either hospital have a dominant strategy (or any dominated strategy)? Assuming
that they determine their strategies independently of one another, what are the hospitals' respective Nash equilibrium strategies? Explain why.
b) Suppose instead that the hospitals coordinate. What actions should they each take?
c) One way for the two hospitals to coordinate is for them to merge. What general
economic reasons might there be for a hospital merger to generate an increase in
profit?
1 answer