Two companies, Acme and Bilco, are sellers in the same market. Each company deci

Question

Two companies, Acme and Bilco, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.

The dominant strategy for Acme is to

charge a high price, and the dominant strategy for Bilco is to charge a high price.

charge a high price, and the dominant strategy for Bilco is to charge a low price.

charge a low price, and the dominant strategy for Bilco is to charge a high price.

charge a low price, and the dominant strategy for Bilco is to charge a low price.

Suppose the outcome of the game is one in which Acme’s profit is $2 million and Bilco’s profit is $7 million. The most likely explanation for this outcome is that

the two companies reached an agreement on what price to charge, and Bilco subsequently cheated.

each company’s objective was to maximize the sum of the two companies’ profits.

each company pursued its dominant strategy.

the two companies reached an agreement on what price to charge, and Acme subsequently cheated.

charge a high price, and the dominant strategy for Bilco is to charge a high price.

charge a high price, and the dominant strategy for Bilco is to charge a low price.

charge a low price, and the dominant strategy for Bilco is to charge a high price.

charge a low price, and the dominant strategy for Bilco is to charge a low price.

Explanation / Answer

i A strategy is a dominant strategy for a player if it yields the best payoff (for that player) no matter what strategies the other players choose.The dominant strategy for ACME is to charge a high price, and the dominant strategy for Bilco is to charge a high price.

ii The two companies reached an agreement on what price to charge, and Bilco subsequently cheated.

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