9. Using a payoff matrix to determine the equilibrium outcome Aa Aa Suppose ther
ID: 1115155 • Letter: 9
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9. Using a payoff matrix to determine the equilibrium outcome Aa Aa Suppose there are only two firms that sell camera phones, Flashtech and Pictone. The payoff matrix that follows shows the profits (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 Flashtech prices low and Pictone prices high, Flashtech will earn a profit of $10 million and Pictone will earn a profit of $3 million Flashtech and Pictone are both profit-maximizing firms Pictone High Price 8, 8 10, 3 Low Price 3, 10 5, 5 High Price Flashtech Low Price If Flashtech prices high, Pictone makes more profits if it chooses a Pictone makes more profits if it chooses a , and if Flashtech prices low, If Pictone prices high, Flashtech makes more profit if it chooses a Flashtech makes more profit if it chooses a , and if Pictone prices low, Given all of the preceding information, pricing low a dominant strategy for both Flashtech and Pictone If the firms do not collude, what strategies will they end up choosing? Both Flashtech and Pictone will choose a low price O Flashtech will choose a high price, and Pictone will choose a low price O Flashtech will choose a low price, and Pictone will choose a high price Both Flashtech and Pictone will choose a high priceExplanation / Answer
If Flastech prices high , Pictone makes more profit if it choses a Low Price . (10>8)
Similarly if Flashtech prices low pictone makes more profit by chosing Low Price (5>3) .
If Pictone prices high , Flashtech prices Low Price
Similarly if Pictone prices low , Flashtech should Low Price .
We get the above results by comparing the payoffs given in the table .
Pricing low is a strictly dominant strategy for both firms .
If they do not collude : both will chose a low price .
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