Two firms complete solely on price. If \"a\" charges a lower price than \"b\", t
ID: 1179372 • Letter: T
Question
Two firms complete solely on price. If "a" charges a lower price than "b", then "a" steals "b's" customers and vice versa. If both charge the same price, they keep their customers if the price is high and if it is low. If each firm charges a high price, they get a high profit. If the firm charges a low price, they get a low profit. The profits are given in the profit matrix below. A's profits are in the upper left hand corner, B's profits are in the lower right side corner.
B
High Price 200 -100
200 300
Low Price 300 50
-100 50
Do these firms have a "dominant" strategy? Explain. What is the Nash equilibrium outcome of their pricing decisions?
Explanation / Answer
Pricing low is the dominant strategy for the firms
A : if B high, A low, payoff 300>200
if B low, A low, payoff 50>-100
B : if A high, B low, payoff 300>200
if A low, B low, payoff 50>-100
As low is the dominant strategy for the firms, Nash equilibrium: (low,low)
where no firm has any intensive to shift its strategy
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