Villij Bank and Pursue Madhattan Bank are the only two banks in the isolated, me
ID: 1111829 • Letter: V
Question
Villij Bank and Pursue Madhattan Bank are the only two banks in the isolated, medium-sized
town of Bayeville. (Barriers to entry make it unlikely that any other important bank would enter
this market.) Each bank must decide on a strategy for pricing its various services. Each can
choose either a high-price strategy or a low-price strategy. The payoffs (in millions of dollars of
economic profits per year):
A. Are there any pure strategy Nash equilibria? Explain your answer.
B. Is your answer to A. the best that the firms can do? Explain your answer.
Explanation / Answer
A. Yes, there is a pure strategy nash equilibria. When Villij Bank chooses low price strategy, Pursue Bank chooses low price strategy too since ( 25>10). Again when Villij Bank chooses high price strategy, Pursue Bank chooses low price strategy still since ( 80>60). On the other hand when Pursue Bank chooses low price strategy, Villij Bank chooses low price strategy and when Pursue Bank chooses high price strategy, Villij Bank still chooses lo price strategy. Hence, irrespective of the strategy both the banks choose low pricing strategy and the nash equilibria is (30,25).
B. This is not the best that the firms can do. The optimal strategies would have been if both had followed high price strategies and earned a payoff of (60,60) which is greater than what they receive by pricing low.
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