Question

1. Consider a market for mid-size sedan with two players, Toyota and Kia.

Each company can set either high price (say $30,000) or low price (say $25,000) for their signature mid-size sedan model. The summary of the game is provided by a 2x2 matrix below. The first number in each payoff box is for Kia and the second number is for Toyota.

		Toyota
		Low P	High P
Kia	Low P	0,0	2,-1
	High P	-1,2	1,1

(a) Identify the Nash Equilibrium (N.E.) outcome.

(b) Based on the N.E. from part (a), would you say that the players are satisfied with the N.E. outcome? Why or why not?

Suppose now that both Toyota and Kia adopts a “Price Matching Policy” (i.e. Lowest Price Guaranteed). For example, Kia will match Toyota’s price if Toyota sets price lower than Kia.

(c) How would this “Price matching policy” change the payoffs? Fill in the matrix below.

		Toyota
		Low P	High P
Kia	Low P	0,0
	High P		1,1

(d) What would be the new Nash Equilibrium given that the players adopts this “Price Matching Policy”. (Obviously, your answer to part (d) would be based on your answer from part (c)).

Answer 1