Two rival companies, Apple and Samsung, are fighting for the market in mobile de

Question

Two rival companies, Apple and Samsung, are fighting for the market in mobile devices. Both are considering the option of lowering their prices. If they both keep prices the same, they'll keep getting the current profit levels. If one lowers prices, but the other doesn't, it could get significantly more profit at the expense of the other, as people buy the cheaper product. If both lower prices, however, both will keep the same market share and thus end up with lower profits. Imagine the payoffs are the following:

                                      Samsung
                                Stay             Lower
Apple       Stay        48, 48       12, 78
                Lower      78, 12       17, 17

(Apple is "player 1", so the first payoff in each pair is Apple's payoff.)

If Apple thinks that there is a 73% chance that Samsung will lower prices, what is the expected value to Apple of lowering prices?

Explanation / Answer

If apple thinks samsung will lower the price by 73% then

Hence,

expected value to apple of lower price = 0.73*17 + (1-0.73)*78 = 33.47

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