) Use the table below to answer the following
questions.
Table 2
Table 2 gives the payoff matrix in terms of economic profit for
firms A and B when there are two strategies facing each firm: (1)
charge a low price, or (2) charge a high price.
a) why the equilibrium in this game (played once) is a dominant
strategy equilibrium ?
b) In Nash equilibrium, what the economic profit firm A makes
?
c) If both firms could successfully collude, what would be firm A's
economic profit?
A) when firm B chooses lower price, firm A will also choose
lower price because 2>-10
When firm B chooses higher price, firm A will choose lower price
because 20>10.
Dominant strategy of A is to choose Lower price in both the
case.
Similarly, when firm A chooses lower price, firm B will also choose
lower price because 5>-10
When firm A chooses higher price, firm B will choose lower price
because 25>20.
Dominant strategy of A is to choose Lower price in both the
case.
Nash equilibrium is then- (lower price by A, lower price by B).
The equilibrium is a dominant strategy Nash equilibrium because if both the firms set higher prices, they will get higher profits but there is a chance that the other firm cheats by setting lower price and in hope of getting even higher profit, thereby incurring loses for the firm which doesnt cheat and sets higher profits. Hence, both the firms will play safe and set lower prices thereby lower price is their dominant strategies.
B) in Nash equilibrium, firm A makes a profit of $2
C) if both firms collude, they will set higher price.
Equilibrium would be (high price by A, high price by A).
Firms A's economic profit = $10
Let me know if you have any doubt :)
) Use the table below to answer the following questions. Table 2 Table 2 gives the...
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