6. Using a payoff matrix to determine the equilibrium outcome Aa Aa Suppose ther

ID: 1118103 • Letter: 6

Question

6. Using a payoff matrix to determine the equilibrium outcome Aa Aa Suppose there are only two firms that sell smartphones, Flashfone and Pictech. The payoff matrix that follows 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 Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $9 million and Pictech will earn a profit of $4 million. Assume this is a simultaneous game and that Flashfone and Pictech are both profit-maximizing firms Pictech High Price 7, 7 9, 4 Low Price 4, 9 6, 6 High Price Flashfone Low Price If Flashfone prices high, Pictech will make more profit if it chooses a Pictech will make more profit if it chooses a price, and if Flashfone prices low price If Pictech prices high, Flashfone will make more profit if it chooses a Flashfone will make more profit if it chooses a price, and if Pictech prices low price Considering all of the information given, pricing high Pictech a dominant strategy for both Flashfone and If the firms do not collude, what strategies will they end up choosing? O Flashfone will choose a low price and Pictech will choose a high price Flashfone will choose a high price and Pictech will choose a low price O Both Flashfone and Pictech will choose a low price O Both Flashfone and Pictech will choose a high price True or False: The game between Flashfone and Pictech is not an example of the Prisoners' Dilemma O True False

Explanation / Answer

If Flashfone prices high, Pictech will make more profit if is chooses a low price , and if Flashfone prices low, Pictech will make more profit if it chooses a low price.

If Pictech prices high, Flashfone will make more profit if is chooses a low price , and if Pictech prices low, Flashfone will make more profit if it chooses a low price.

Pricing high is not a dominant strategy for both Flashfone and Pictech.

Firms do not collude:

- Both Flashfone and Pictech will choose a low price

The statement is false. (Players end up in a position which is not efficient)