Two firms are competing in an oligopolistic industry. Firm 1, the larger of the two firms, is contemplating its capacity strategy, which could be either "aggressive" or "passive." The aggressive strategy involves a large increase in capacity aimed at increasing the firm's market share, while the passive strategy involves no change in the firm's capacity. Firm 2, the smaller competitor, is also pondering its capacity expansion strategy; it will also choose between an aggressive strategy and a passive strategy. The following table shows the profits associated with each pair of choices:
a) If both firms decide their strategies simultaneously, what is the Nash equilibrium?
b) If Firm 1 could move first and credibly commit to its capacity expansion strategy, what is its optimal strategy? What will Firm 2 do