Assume two companies: Lexus and BMW, where Lexus has introduced a new car that requires no maintenance for five years, people like it so much. A couple of years later, BMW has worked on a
similar technology but is hesitant whether to enter or do not enter this market; BMW is not fully
sure of the response of Lexus if it enters this prospering market; Lexus may or may not lower the
price of its car.
If BMW enters the market and Lexus reduces its price, then BMW loses $100 million, whereas Lexus
profit stands at $250
million. However, it BMW enters the market it will generate $120 million profit
conditioned on Lexus keeping its price the same and making $280 million profit.
On another ground, if Lexus lowers its price, it makes $320 million profit if BMW does not enter the
market and thus making $0 profit. Similarly, BMW receives $0 profit if it does not enter the market
while Lexus keeps its price the same and generating $400 million profit.
From thus, we conclude that Lexus has two strategies: Lower the price or keep price the same.
While BMW has two strategies: Enter the market or Do not enter the market.
Develop a payoff matrix for this situation, and then answer the following question: What is the
best strategy for BMW if Lexus lowers the price?
•enter the market where it makes $120 million profit

•do not enter the market

•do not enter the market and make $120 million profit

•do not enter the market where Lexus makes $400 million profit