Question

Suppose there are only two firms that sell smart phones, Flashfone and Pictech. The following payoff matrix shows the profit (in millions of dollars) each company will eam, depending on whether it sets a high or low price for its phones. Pictech Pricing High Low 9,9 2,15 High Flashfone Pricing Low 15,2 8,8 For example, the lower, left cell shows that if Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $15 million and Pictech will earn a profit of $2 million. Assume this is a simultaneous game and that Flashfone and Pictech are both profit-maximizing firms. If Flashfone prices high, Pictech will make more profit if it chooses a price. price, and if Flashfone prices low, Pictech will make more profit if it chooses a If Pictech prices high, Flashfone will make more profit if it chooses a chooses a price. price, and if pictech prices low, Flashfone will make more profit if it Considering all of the information given, pricing high a dominant strategy for both Flashfone and Pictech. If the firms do not collude, which strategy will they end up choosing? Both Flashfone and Pictech will choose a low price. O Flashfone will choose a high price and Pictech will choose a low price.

Answer 1

Pictech Pricing Low High 9,9 High 2,15 Flashfone Pricing Low 15,2 8,8

If Flashtone prices high, Pictech will make more profit if it chooses a Low price, and if Flashfone prices are low, Pictech will make more profit if it chooses a Low prices.

If Pictech prices high, Flashfone will make more profit if it chooses Low price, and if Pictech prices are low, Flashfone will make profit if it chooses a Low prices

We can see that, Pictech always choose Low price in response to any strategy of Flashfone. Hence, Low prices is a dominant strategy of Pictech

Similarly, Low prices is dominant strategy of Flashfone.

Considering all of the information give, pricing high is not a dominant strategy for both flashfone and Pictech.

If the firms do not collude, then they end up choosing their respective dominant strategy (if they have dominant strategy)

Hence, both Flashfone and Pictech will choose a low price.

Answer: Option (A)

True: The game between Flashfone and Pictech is an example of the prisoner's dilemma

because nash equilibrium (of choosing low prices) is not the best case scenario. Best case scenario would be colluding and maximizing jointly profit by choosing high prices.