Question

Complete the payoff matrix to show how this scenario would end up as a prisoner's dilemma for Horizon and AT-Phone.

Answer 1

Refer the attached picture

Low Low $ 27,000 $ 27,000 $ 22,500 $ 30,000 High $ 30,000 $ 22,500 $ 24,000 $ 24,000 High

If both firms create cartel then only both the forms will be cooperating each other. Thus, the first cell is cooperative outcome.

If AT mobile takes the strategy to produce high then Horizon would select to produce high that is $ 24,000.

And when AT mobile goes for low then Horizon would go for high that is $ 30,000.

That is both players will attempt to protect themselves. Thus, cell (2,2) represents prisoners dilemma.

Thus, we can say the cell (2,2) represents nash equilibrium and it is the dominant strategy for both players.

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