Question

13 Question 4. LeBlanc Lovely and Walchuk Waybest are two independent firms operating in the after-midnight take-out (away) food service market in the city. If they decide to cooperate, they can charge the same price (56) for a slice of pizza or compete and charge $3 per slice in hopes of increasing their market share. The payoff matrix, nightly profits, is featured below. LeBlanc Lovely Charges $6 for a plzza slice Charges $3 for a pizza slice 0 Profit: $5,000 Profit: $3,000 Profit: $3,000 Profit: $1,000 Summer be Charges $6 for a pizza slice Walchuk Waybest for a pizza slice Profit: $1,000 Profit: $1,500 ES se Profit: $5,000 Profit: $1,500 a. Do either of these firms have a dominant strategy? Explain. [2 marks] b. If the firms decide to collude, what is the outcome in terms of joint profit? [2 marks) 1 July 2020 TWT 2 3 7 14 15 16 17 21 22 23 24 28 29 30 C. Has either firm an incentive to cheat, that is not ? Why or why not? [1 mark] d. What is the Nash equilibrium outcome in this game? Explain. [2 marks)

Answer 1

a. Voth firms have a dominant strategy to" charge $3 for a pizza slice". Irrespective of what the other player does, Both firms always chooses $3 price for a pizza slice.

b. If both firms collude they will charge $6 price for a pizza slice.

As it will give them highest mutual profit of $3000 each.

c. Both firm have an incentive to cheat as the firm which reduces the price to $3 can increase the profit from $3000 to $5000.

d. Nash Equilibrium is for both firm is to charge $3 per pizza slice and get $1500 profit each.

As the dominant strategy for both firms of to charge $3 per pizza slice.