Question

6. Using a payoff matrix to determine the equilibrium outcome

Suppose there are only two firms that sell tablets: Padmania and Capturesque. 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 tablets.

		Capturesque Pricing
		High	Low
Padmania Pricing	High	11, 11	3, 20
	Low	20, 3	10, 10

For example, the lower-left cell shows that if Padmania prices low and Capturesque prices high, Padmania will earn a profit of $20 million, and Capturesque will earn a profit of $3 million. Assume this is a simultaneous game and that Padmania and Capturesque are both profit-maximizing firms.

If Padmania prices high, Capturesque will make more profit if it chooses a   price, and if Padmania prices low, Capturesque will make more profit if it chooses a   price.

If Capturesque prices high, Padmania will make more profit if it chooses a   price, and if Capturesque prices low, Padmania will make more profit if it chooses a   price.

Considering all of the information given, pricing low   a dominant strategy for both Padmania and Capturesque.

If the firms do not collude, what strategies will they end up choosing?

Both Padmania and Capturesque will choose a high price.

Both Padmania and Capturesque will choose a low price.

Padmania will choose a low price, and Capturesque will choose a high price.

Padmania will choose a high price, and Capturesque will choose a low price.

True or False: The game between Padmania and Capturesque is an example of the prisoners’ dilemma.

True

False

Answer 1

low; low
(If Padmania choose high price and low price, Capturesque's best response are low price and low price respectively as 20 > 11 and 10 > 3.)

low; low
(If Capturesque choose high price and low price, Padmania's best response are low price and low price respectively as 20 > 11 and 10 > 3.)

is
(Thus, low is a dominant strategy for both.)

Both Padmania and Capturesque will choose a low price.
(Dominant strategy will be chosen.)

True
(If they collude they can choose high price and get higher profit.)