2. Using a payoff matrix to determine the equilibrium outcome Suppose there are

Question

2. 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 High 11, 11 Low 15, 3 Low 3, 15 9, 9 Padmania Pricing For example, the lower-left cell shows that if Padmania prices low and Capturesque prices high, Padmania will earn a profit of $15 million, and Capturesque will earn a profit of $3 million. Assume this is a simultaneous game and that Padmania and Capturesque are both profit-maximizing firms. If Padmania prices high, Capturesque will make more profit if it chooses a Padmania prices low, Capturesque will make more profit if it chooses a price, and if price price, and if If Capturesque prices high, Padmania will make more profit if it chooses a Capturesque prices low, Padmania will make more profit if it chooses a price a dominant strategy for both Considering all of the information given, pricing low Padmania and Capturesque If the firms do not collude, what strategies will they end up choosing? o Padmania will choose a high price, and Capturesque will choose a low price o Both Padmania and Capturesque will choose a low price. o Both Padmania and Capturesque will choose a high price o Padmania will choose a low price, and Capturesque will choose a high price. True or False: The game between Padmania and Capturesque is an example of the prisoners dilemma O True o False

Explanation / Answer

If Padmania prices 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 a low price.

Considering all of the information given, pricing low IS a dominant strategy for both Padmania and Capturesque.

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

Both Padmania and Capturesque will choose a low price

As it has become a strategy and both companies do not want to come to a secret understanding , then both have to keep low prices to get high profits.

The game between Padmania and Capturesque is an example of the prisoners' dilemma

True

Prisoners' dilemma is a phenomenon where in two companies will not come into same terms whatsoever may be the case whether it is in their favour or not but they will not cooperate with each other. Here, too Padmania and Capturesque are not ready to collude resulting in keeping low prices.

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