Question

1. Two firms operating in the same market must choose between a high price and a low price. In the payoff matrix below, Firm A's profit is listed before the comma, B's profit is listed after the comma. The firms are playing a one-period (“one shot”) simultaneous game.

		Firm B
		High Price	Low Price
Firm A	High Price	40,40	18,50
	Low Price	50,18	25,25

1. State whether each firm does or does not have a dominant strategy. No explanation is necessary – you need only clearly indicate your answer

1. Is the above game a Prisoners’ Dilemma? Briefly explain why or why not.

Answer 1

A) A dominant strategy for a firm is the strategy that makes the firm better off always regardless of what it's opponent chooses.

Firm A's Dominant strategy is 'low price' because Matter what firm B chooses, firm A is always better off by choosing low price.

Firm B's dominant strategy is also 'low price', because setting low price always earns firm B higher payoff.

B) A prisoner's dilemma is a game where two players acting strategically will ultimately result in a suboptimal equilibrium outcome. Communication between the two players can drastically alter their best strategies.

The given game is an example of prisoners dilemma, because when the two firms plays without cooperation, they both end up setting low price. But if they communicate, and choose high price, they could have earned higher payoff.