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The market research team working on this project creates this payoff matrix that represents the scaled values that customers give to the different levels of service and the corresponding payoffs for the telecom company: 

  

Customer

 

Telecom Company

Buy

Don’t Buy

 

Upgrade

(2,   2)

(0,   1)

 

Don’t Upgrade

(3,   0)

(1,   1)

You recognize that the payoff matrix is not the best way to analyze this scenario. You will construct a game tree to model the scenario and perform backwards induction to find the optimum strategy, explaining all of your reasoning along the way. 

Slide 1

· Explain why a game tree must be used in this scenario instead of a payoff matrix.

· Identify who will go first in the game

Slide 2

· Draw the game tree that represents the scenario using the payoff matrix given above.

· Identify and explain any non-credible threats.

Slide 3

· Redraw the game tree with any non-credible threats removed.

· Identify and explain where the first step of backwards induction will occur.

Slide 4

· Using the game tree from slide 3, perform the first step of backwards induction.

· Explain your reasoning behind the step you took.

Slide 5

· Redraw the game tree after the first step of backwards induction.

· Identify where the next step of backwards induction occurs.

Slide 6

· Using the game tree from slide 5, perform the next step of backwards induction.

· Explain your reasoning behind the step you took.

Slide 7

· Redraw the game tree after the step you took in slide 6.

· Identify the optimum strategy of the game. 

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