Question

University Subs and Savory Sandwiches are the only two sandwich shops in a small college town. If neither runs a special two-for-one promotion, both are able to keep their prices high and earn $10,000 a month. However, when both run promotions, their profits fall to $1,000. Finally, if one runs a promotion and the other does not, the shop that runs the promotion earns a profit of $15,000, and the other loses $5,000.

Answer 1

1) run a 2 for 1 promotion. This is a dominant strategy because when the rival runs a 2 for 1 promotion University subs are making a profit of $1000 when they run promotion and they lose $5000 when they keep the price high. This implies that they have a relatively higher profit when they run a promotion. The same is true when the rival keeps a price high. University subs are making a greater profit of $15000 when they run a promotion.

Therefore the dominant strategy is to run a 2 for 1 promotion

2) no. highest profit for both of them is available when they both keep the price high. This profit is $10,000 which is greater than the current profit of 1000 when they run a promotion.