Two firms, Allied Corporation and Union, Inc., compete primarily by price. Each

Question

Two firms, Allied Corporation and Union, Inc., compete primarily by price. Each firm must choose either a high price or a low price simultaneously. The following payoff table shows the profit each firm would earn in each of the four possible decision combinations: Allied's dominant strategy is (low price, high price, it has no dominant strategy). Union's dominant strategy is (low price, high price, it has no dominant strategy). The likely outcome of this simultaneous pricing decision is for Allied to price (low, high) and for Union to price (low, high). The decision situation facing Allied and Union (is, is not) a prisoners' dilemma. Is the likely outcome stated above () a Nash equilibrium. Explain why? Which cell represents the cooperative outcome? Cell Is the cooperative outcome sustainable in equilibrium? Explain why or why not.

Explanation / Answer

a. low price strategy

b. low price stragey

c. high and low

d. is not

e. yes, there are only two firms hence nash equilibrium is applicable

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