Question

There are two firms in an industry. If both collude and set the monopolistic price, their profits will be $20 million each. If one firm sets the higher monopoly price and the other tries to get more business by charging a lower price, the high-priced firm earns $6 million in profits and the low-priced firm earns $30 million in profits. If both charge low prices, both earn $10 million. What is the most likely outcome for the two firms?

a.	one will charge the high price, and then the other will charge the low price
	b.	both will charge the high price
	c.	both will charge the low price
	d.	there is no dominant strategy in this case.

Answer 1

Answer:

c. both will charge the low price

reason:

The payoff matrix:
  

Firm 2 Low Firm 1 High Low High 20, 20 30, 6 6, 30 10, 10

Each firm has dominant strategy to charge low price no matter what the other firm does. So, the outcome will be (Low, Low) with payoff (10, 10).