Question

Station B R с Two gas stations, A and B, are locked in a price war. Each player has the option of raising its price (R) or continuing to charge the low price (C). They will choose strategies simultaneously. If both choose C, they will both suffer a loss of $-10. If one chooses R and the other chooses C, (i) the one that chooses R loses many of its customers and earns $0, and (ii) the one that chooses C wins many new customers and earns $100. If they both choose R the price war ends and they each earn $50. Does either player have a dominant strategy? Explain. O A. The stations have a dominant strategy, which is for Station A to pick C and Station B to pick R because this is a best response regardless of what the other station does. B. The stations do not have dominant strategies because what works best depends on what the other station does. OC. The stations have a dominant strategy, which is to pick C because this is a best response regardless of what the other station does. OD. The stations have a dominant strategy, which is to pick R because this Station A: 50 Station A: 0 R Station B:50 Station B: 100 Station A Station A: 100 Station A: - 10 с Station B: 0 Station B: 10

Answer 1

Option B is correct. Station A will raise its price when station B decides to charge a low price. However it will charge a low price when station B raises its price. The same is true for station B. This indicates that what one station does depends upon the decision taken by the other station

Option A is correct because there are two Nash equilibria. This happens since the decision taken by one station influences the decision taken by the other.