A firm is deciding whether to invest in shipbuilding. If it can produce at sufficiently large scale, it knows the venture will be profitable.
(A)
There is a “good” outcome, in which both types of investments are made, and both the shipyard and the steelmakers end up profitable and happy. Equilibrium is reached. Then there is a “bad” outcome, in which neither type of investment is made. This second outcome also is an equilibrium because the decisions not to invest reinforce each other.
(B)
Assume that shipyards are the only potential customers of steel. Steel producers figure they’ll make money if there’s a shipyard to buy their steel, but not otherwise. Now we have two possible outcomes ― what economists call “multiple equilibria.”
(C)
But one key input is low-cost steel, and it must be produced nearby. The company’s decision boils down to this: if there is a steel factory close by, invest in shipbuilding; otherwise, don’t invest. Now consider the thinking of potential steel investors in the region.
* equilibrium: 균형