6. Using a payoff matrix to determine the equilibrium outcome Suppose there are
ID: 1122900 • Letter: 6
Question
6. Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell tablets: Padmania and Capturesque. 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 tablets. Capturesque Pricing High Low High 11, 11 2,18 Low 18,2 10,10 Padmania Pricing For example, the lower-left cell shows that if Padmania prices low and Capturesque prices high, Padmania will earn a profit of $18 million, and Capturesque will earn a profit of $2 million. Assume this is a simultaneous game and that Padmania and Capturesque are both profit-maximizing firms. ', price, and if Padma nia prices low, Capturesque will make more If Padmania prices high, Capturesque will make more profit if it chooses aP profit if it chooses a price. price, and if Captu resque prices low, Padmania will make more If Capturesque prices high, Padmania will make more profit if it chooses a profit if it chooses a price Considering all of the information given, pricing high a dominant strategy for both Padmania and Capturesque.Explanation / Answer
According to the given pay-off matrix -
If Padmania price high, Capturesque will make more profit if it chooses a low price, and if Padmania prices low, Capturesque will make more profit if it chooses a low price.
If Capturesque prices high, Padmania will make more profit if it chooses a low price, and if Capturesque prices low, Padmania will make more profit if it chooses low price.
Considering all information given, pricing high is not a dominant strategy for both Padmania and Capturesque.
The dominant strategy for both is to charge low price.
So, if the firms do not collude, they both will end up choosing a low price.
The correct answer is the option (4).
It can be seen that both firms are choosing low price strategy even when their pay-off would be greater if they choose high price strategy.
Such behavior is an example of prisoners' dilemma.
Thus, the given statement is False.
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