Question

1. IHOP is also a client of yours. The chain is under strong competitive pressure from Denny’s. IHOP hires you to evaluate how an increase in its product average price may impact sales given its competitive position in the market. For 15 points, evaluate dominant pricing strategies, if there is, and likely result(s) (Nash equilibrium or equilibria) by assuming interdependence and using the payoff matrix below (payoffs are in billions).

Dennys should be on the top and IHOP should be on the left side of the chart. Formatting issues. Thanks

IHOP Dennys   

	Increase Price	Leave Price as is
Increase Price	$2,549.74   $2,212.43	$2,538.37 $2,358.55
Leave Price as is	$2,716.53 $2,203.87	$2,527.00 $2,194.00

Answer 1

A-

If IHOP decides to increase price, it is optimal for Dennys to leave price as is.

If IHOP decides to leave price as is, it is optimal for Dennys to increase price.

So, there is no dominant strategy for Dennys.

If Dennys decides to increase price, it is optimal for IHOP to leave price as is.

If Dennys decides to leave price as is, it is optimal for IHOP to increase price.

So, there is no dominant strategy for IHOP.

B- There are two nash equilibria -( IHOP leave price as is and Dennys increase price) , (IHOP increase price and Dennys leave price as is).

At these strategies there is no incentive for any firm to switch to other strategy and hence they are nash equilibrium.