Suppose there are only two firms that sell Blu-ray players: Movietonia and Video

Question

Suppose there are only two firms that sell Blu-ray players: Movietonia and Videotech. The following 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 players.

For example, the lower-left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $18 million, and Videotech will earn a profit of $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profit-maximizing firms.

If Movietonia prices high, Videotech will make more profit if it chooses a   price, and if Movietonia prices low, Videotech will make more profit if it chooses a   price.

If Videotech prices high, Movietonia will make more profit if it chooses a   price, and if Videotech prices low, Movietonia will make more profit if it chooses a   price.

Considering all of the information given, pricing high   a dominant strategy for both Movietonia and Videotech.

If the firms do not collude, what strategies will they end up choosing?

Both Movietonia and Videotech will choose a high price.

Both Movietonia and Videotech will choose a low price.

Movietonia will choose a high price, and Videotech will choose a low price.

Movietonia will choose a low price, and Videotech will choose a high price.

True or False: The game between Movietonia and Videotech is not an example of the prisoners’ dilemma.

True

False

1) high or low
2) high or low
3) high or low
4) high or low
5) is or is not

Explanation / Answer

If Movietonia prices high, Videotech will make more profit if it chooses a 'low' price, and if Movietonia prices low, Videotech will make more profit if it chooses a 'low' price

If Movietonia prices high then by choosing low price Videotech will make a profit of $18 million and will make a profit of $11 million by choosing high price so it will choose low price.

If Movietonia prices low then by choosing low price Videotech will make a profit of $10 million and will make a profit of $2 million by choosing high price so it will choose low price.

If Videotech prices high, Movietonia will make more profit if it chooses a 'low' price, and if Videotech prices low, Movietonia will make more profit if it chooses a 'low' price

The decision Movietonia will take would also because of the same reason as mentioned above for Videotech.

Pricing high is not a dominant strategy for both Movietonia and Videotech.? In dominant strategy by choosing an alternative you will always be at a better payoff no matter what other player choose. But in this case by choosing a higher price no one is at a dominant position as if other play chooses low price then profit of the company will fall. So payoff are declining depending on the strategy of other player.

If firms do not collude then both firms will try to maximize their profit. They will follow low price strategy to maximize their profit. So both firms will choose a low price

This is the exapmle of prisoner's dilemma. As in this case both companies can choose a high price strategy and gain more profit. But they will act on their self interest to price low and get more profit but in the end both firms will price lower and gets profit of $10 million

the answers are?:

1) low
2) low
3) low
4) low
5) is not

False - This is example of prisoners dilemma

Both Movietonia and Videotech will choose a low price

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