Using a payoff matrix to determine the equilibrium outcome Suppose there are onl

Question

Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell camera phones, Flashtech and Pictone. The payoff matrix that follows shows the profits (in millions of dollars) each company will earn depending on whether it sets a high or low price for Its phones. For example, the lower left cell shows that if Flashtech prices low and Pictone prices high, Flashtech will earn a profit of $9 million and Pictone will earn a profit of $4 million. Flashtech and Pictone are both profit-maximizing firms. If Flashtech prices high, Pictone makes more profits if it chooses a and if Flashtech prices low, Pictone makes more profits if it chooses a If Pictone prices high, Flashtech makes more profit if it chooses a and if Pictone prices low, Flashtech makes more profit if It chooses a Given all of the preceding information, pricing high a dominant strategy for both Flashtech and Pictone. If the firms do not collude, what strategies will they end up choosing? Both Flashtech and Pictone will choose a low price. Flashtech will choose a high price, and Pictone will choose a low price. Both Flashtech and Pictone will choose a high price. Flashtech will choose a low price, and Pictone will choose a high price.

Explanation / Answer

1. If Flashtech prices high, Pictone makes more profits if it chooses a low price. and if Flastech prices low, Pictone makes more profit if it chooses a low price.

2. If Pictone prices high, Flashtech makes more profit if it chooses a low price. and if Pictone prices low, Flashtec makes more profit if it chooses a low price.

3. Given all of the preceding informatino, pricing high is not a dominant strategy for both Flashtech and Pictone.

4. If the firms do not collude, the firms will end up choosing option a: Both Flashtech and Pictone will choose a low price.

Since, both the firms are interested in yielding a higher profit compared to the other firm. But when both the firms charge low price, they end up having high profits, so both the firms will end up choosing a low price.

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