Consider a remote town in which two restaurants, All-You-Can-Eat Cafe? and GoodGrub Diner, operate in a duopoly. Both restaurants disregard health and safety regulations, but they continue to have customers because they are the only restaurants within 80 miles of town. Both restaurants know that if they clean up, they will attract more customers, but this also means that they will have to pay workers to do the cleaning.

If neither restaurant cleans, each will earn $14,000; alternatively, if they both hire workers to clean, each will earn only $11,000. However, if one cleans and the other doesn't, more customers will choose the cleaner restaurant; the cleaner restaurant will make $18,000, and the other restaurant will make only $6,000.

Complete the following payoff matrix using the previous information. (Note: All-You-Can-Eat Cafe? and GoodGrub Diner are both profit-maximizing firms.)

Both restaurant will clean up

Explanation:

In the table below the first number in the parentheses belongs to All-You-Can-Eat Café? and the second number belongs to GoodGrub Diner. And the titles (Clean Up and Not Clean) represents their options separately.

GoodGrub Diner

Clean Up Not Clean

All-You-Can-Eat Café? Clean Up (11 000, 11 000) (18 000, 6 000)

Not Clean (6 000, 18 000) (14 000, 14 000)

If All-You-Can-Eat Café? cleans up, GoodGrub Diner will earn 11 000 dollars by cleaning up verses 6 000 dollars by not cleaning. And if All-You-Can-Eat Café? doesn't clean, GoodGrub Diner will earn 18 000 dollars by cleaning up verses 14 000 dollars by not cleaning. Similarly All-You-Can-Eat Café? will be better off by cleaning up both in the case where GoodGrub Diner cleans up and in the case where GoodGrub Diner doesn't clean, comparing with the cases All-You-Can-Eat Café? doesn't clean.

Each restaurant adopts the strategy that is best for itself regardless of which strategy the other restaurant chooses. This is called the Nash equilibrium.