2. Scenario I: Consumers are ready to commit Aa Aa Consider a game with two play

Question

2. Scenario I: Consumers are ready to commit Aa Aa Consider a game with two players: Sony and Microsoft. Each firm can adopt distinct strategies in an attempt to win the latest episode of the "console wars." The article describes the actual strategy adopted by each firm; in the problems that follow, you will consider the possible strategies each firm could have chosen before unveiling its console Consider the following strategies. Sony can choose to offer a basic model (with low production costs) or a model with a Blu-ray DVD player (with higher production costs). For Microsoft, assume that it can choose to offer a low price model or a high price model (with more features, including an HD DVD player, which was, at the time, a rival to Blu-ray players) Assume that consumers in the market were eager to have the new generation of video game technology, so they didn't want to wait until the market established a standard DVD format Consider the payoff matrix below. Note: The first number in each cell represents the payoff to the row player, Sony, and the second number represents the payoff to the column player, Microsoft Microsoft Low Price 130, 20 50, 50 High Price 40, 40 Blu-ray PS3 Sony Basic PS3 -10, 110 A Nash equilibrium occurs when each firm chooses a strategy and neither firm can benefit by changing its strategy given the strategy selected by the other player. Using the payoff matrix, which of the following outcomes is the Nash equilibrium in this game? O Basic PS3, low price O Basic PS3, high price O Blu-ray PS3, low price O Blu-ray PS3, high price O There is more than one Nash equilibrium A dominant strategy is a strategy that yields a higher payoff to a player, regardless of the strategy selected by the other player. In this scenario, Microsoft has a dominant strategy A prisoners' dilemma is a game in which players would benefit from cooperation. That is, by cooperating, botlh players could achieve a better outcome than they do by relying on individual, non-cooperative strategies True or False: This game is a prisoners' dilemma O False O True

Explanation / Answer

If Sony chooses to offer Blu-ray PS3 then Microsoft can get pay-off of 20 if it offers lower price model and can get pay-off of 40 if it offers high price model. Since, pay-off is higher in case of high price model, Microsoft will offer high price model if Sony chooses to offer Blu-ray PS3.

If Sony chooses to offer Basic PS3 then Microsoft can get pay-off of 50 if it offers lower price model and can get pay-off of 110 if it offers high price model. Since, pay-off is higher in case of high price model, Microsoft will offer high price model if Sony chooses to offer Basic PS3.

It can be seen that Microsoft will offer high price model irespective of strategy adopted by Sony. Thus, high price model is the dominant strategy of Microsoft.

If Microsoft chooses to offer low-price model then Sony can get pay-off of 130 if it offers Blu-ray PS3 and can get pay-off of 50 if it offers basic PS3. Since, pay-off is higher in case of Blu-ray PS3, Sony will offer Blu-ray PS3 if Microsoft chooses to offer low price model.

If Microsoft chooses to offer high-price model then Sony can get pay-off of 40 if it offers Blu-ray PS3 and can get pay-off of -10 if it offers basic PS3. Since, pay-off is higher in case of Blu-ray PS3, Sony will offer Blu-ray PS3 if Microsoft chooses to offer high price model.

It can be seen that Sony will offer Blu-ray PS3 irespective of strategy adopted by Microsoft. Thus, Blu-ray PS3 is the dominant strategy of Sony.

When both players have dominant strategies then combination of that dominant strategies is the Nash equilibrium.

So, in given case, Nash equilibrium is (Blu-ray PS3, High price).

Hence, the correct answer is option 3.

In the given scenario, both Sony and Microsoft has (Blu-ray PS3, High price) as dominant strategy.

In this game, if both would have cooperated and chosen the outcome (Basic PS3, Low price) then both would have got the pay-off of 50 each. On the other hand, by non-cooerating both had choosen (Blu-ray PS3, High price) with pay-off of 40 each.

Since, cooperation could have increased the pay-off of the two and are losing due to non-cooperation, this game is prisoners' dilemma game.

Hence, the correct answer is TRUE.

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