Question

Using a payoff matrix to determine the equilibrium outcome

Suppose there are only two firms that sell smart phones, Flashfone and Pictech. 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 phones.

		Pictech Pricing
		High	Low
Flashfone Pricing	High	11, 11	2, 18
	Low	18, 2	10, 10

For example, the lower, left cell shows that if Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $18 million and Pictech will earn a profit of $2 million. Assume this is a simultaneous game and that Flashfone and Pictech are both profit-maximizing firms.

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

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

Considering all of the information given, pricing high   a dominant strategy for both Flashfone and Pictech. (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 Flashfone and Pictech will choose a low price.

Flashfone will choose a low price and Pictech will choose a high price.

Both Flashfone and Pictech will choose a high price.

Flashfone will choose a high price and Pictech will choose a low price.

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

True

False

Answer 1

Solution:-

a) If Flashfone prices high

Pictech prices low

If Flashfone prices low,

Pictech prices low

b) If Pictech prices high

Flashfone prices low

If Pictech prices low,

Flashfone prices low

c) Prices high is not a dominant strategy

d) Both flashfone and pictech will choose low price

e) True. Nash Equilibrium is not the best case scenario. Best case scenario is by colluding and keeping prices high. Hence it is a prisoners' dilemma.

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