Godrickporter and Star Connections are the only two airport shuttle and limousin

Question

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. The table above shows the payoff matrix for this advertising game. Is there a dominant strategy for Godrickporter? If so, what is it? If not. why not? Is there a dominant strategy for Star Connections? If so. what is it? If not, why not? Suppose Wal-Mart and Target both advertise that they will match the lowest price offered by any competitor. What is the purpose of such a strategy?

Explanation / Answer

Q2. a.) yes, there is a dominant strategy for godrtickporter is to " increase advertising budget ".

remember that 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.

b.) yes, there is a dominant strategy for star connection is to " increase advertising budget ". note that combined payoff to star connection by not touching advertising budget is $22,000 profit, in comparison to $23,000 profit otherwise

Q3.) the major purpose of this strategy is  to signal to each other that they intend to charge the high price. the signal is clear because each store knows that if it charges lower price, the other store will automatically retaliate by also lowering its price. the offer to match prices is a good enforcement mechanism because it guarantees that if either store fails to cooperate and charges the lower price it is automatically punished by having its competitor also charge the lower price.

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