Explain why the payoff matrix in Problem 1 indicates that firms A and B face the

Question

Explain why the payoff matrix in Problem 1 indicates that firms A and B face the prisoners' dilemma.

Problem 1 states:  from the following payoff matrix, where the payoffs are the profits or lesses of the two firms, determine (a) whether firm A has a dominant strategy, (b) whether firm B has a dominant strategy, and (c) the optimal strategy for each firm

                                                        firm B

                                                  Low Price                    High Price

                   Low Price                  (1,1)                          (3, 21)

Firm A

                  High Price                 (21,3)                        (2,2)

Explanation / Answer

The firms A and B face prisoner's dilemma because they have both better pay-offs with High prices but still both have to go for Low prices as it is their best choice. They are in a dilemma as to trust their competition to keep high prices so as to gain more.

a) Firm A has no dominant strategy

b) Firm B also don't have dominant strategy

c) Optimal strategy for both firms is keeping their prices High

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