Question

Suppose there are only two firms that sell digital cameras, Picturesque and Capturemania. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its cameras.

		Capturemania Pricing
		High	Low
Picturesque Pricing	High	9, 9	2, 19
	Low	19, 2	8, 8

For example, the lower, left cell shows that if Picturesque prices low and Capturemania prices high, Picturesque will earn a profit of $19 million and Capturemania will earn a profit of $2 million. Assume this is a simultaneous game and that Picturesque and Capturemania are both profit-maximizing firms.

If Picturesque prices high, Capturemania will make more profit if it chooses a________ price, and if Picturesque prices low, Capturemania will make more profit if it chooses a   price.

If Capturemania prices high, Picturesque will make more profit if it chooses a_________ price, and if Capturemania prices low, Picturesque will make more profit if it chooses a   price.

Considering all of the information given, pricing high ________ a dominant strategy for both Picturesque and Capturemania. (Note: A dominant strategy is a strategy that is best for a player regardless of the strategies chosen by the other players.)

If the firms do not collude, which strategy will they end up choosing?

Both Picturesque and Capturemania will choose a low price.

Picturesque will choose a low price and Capturemania will choose a high price.

Picturesque will choose a high price and Capturemania will choose a low price.

Both Picturesque and Capturemania will choose a high price.

True or False: The game between Picturesque and Capturemania is not an example of the prisoners' dilemma.

True

False

Answer 1