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IAI Actuarial Core Principles · Business Management · Decision-making process, attitude to risk and competition

Two Indian general insurers each decide whether to adopt a new common digital claims platform. Payoffs are highest (Rs 40 crore each) if both adopt, moderate (Rs 20 crore each) if neither adopts, and low if only one adopts (adopter Rs 5 crore, non-adopter Rs 10 crore). Which statement is correct?

There are two pure-strategy Nash equilibria: both adopt and neither adopts. Each firm's best choice depends on what the rival does, so no strategy is dominant. This is a coordination game, with both adopting giving the better payoff.

  1. AThere are two pure-strategy Nash equilibria, both adopt and neither adoptsCorrect
  2. BNot adopting is a dominant strategy for both firms
  3. CAdopting is a dominant strategy for both firms
  4. DOnly the neither-adopts outcome is a Nash equilibrium
  5. The game has no pure-strategy Nash equilibrium

Explanation

If the rival adopts, adopting gives 40 against 10 for not adopting, so adopt. If the rival does not adopt, not adopting gives 20 against 5, so do not adopt. Hence both adopt and neither adopts are equilibria, and neither strategy is dominant. This is a coordination game.

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