Given the below payoff matrix, (a) indicate the best strategy for each firm. The

Question

Given the below payoff matrix, (a) indicate the best strategy for each firm. The strategies for firm A are low price and high price and the strategies for firm B are enter and don't enter. What is the best (optimal) strategy for each firm?

(b) Why is the entry-deterrent threat by firm A to lower the price not credible to firm B?

(c) What could firm A do to make its threat credible without building excess capacity? Will firm A use the low price as a threat if firm B enters?

Firm A: Low Price = (3,-1) and (3,1)

             High Price = (4,5) and (6,3)

Firm B :Enter = (3,-1) and (4,5)

             Don't Enter = (3,1) and (6,3)

Explanation / Answer

Firm A : High Price, don't enter (high price is the dominant stategy)

Firm B : Enter, high price

as firm A has high price as the dominant strategy that shall be preferred even if firm B enters.

Firm A shall try to reduce the cost of production and improve productivity through capital investments in technological improvements increasing the entry cost for firm B. Firm A shall not use the low cost threat as the payoff from high price is higher.

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