Suppose there are only two firms that sell smart phones, Flash fine and Pitch. T

Question

Suppose there are only two firms that sell smart phones, Flash fine and Pitch. The table that follows (known as a payoff matrix) shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its phones. For example, the lower-left cell shows that if Flash one prices low and Pitch prices high, Flash one will earn a profit of $9 million and Pitch will earn a profit of $2 million. Assume this is a simultaneous game and that Flash one and Pitch are both profit-maximizing firms. If Flash one prices high, Pitch will make more profit if it chooses a price, and if Flash one prices low, Pitch will make more profit if it chooses a price. If Pitch prices high, Flash one will make more profit if it chooses a price, and if Pitch prices low, Flash one will make more profit if it chooses a price. Considering all of the information given, pricing high a dominant strategy for both Flash one and Pitch. If the firms do not collude, what strategies will they end up choosing? True or False: The game between Flashfone and Pictech is an example of the Prisoners' Dilemma.

Explanation / Answer

By examining the payoff matrix,

Low, Low

Low, Low

Both firms will choose low because regardless of what the other chooses,

the strategy of choosing low gives both firms higher payoffs.

So,

is not

Both Flashfone and Pictech will choose a low price

True. - The ranking of preferences

(Low, High) > (Low,Low)> (High,High) > (High, Low) for Player 1 (in this case Flashfone)

(High, Low) > (High, High) > (Low, Low) > (Low, High) for Player 2 (in this case Pictech)

is regarded as a game of Prisoners' Dilemma.

If anything is unclear, please comment.

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