Question

Refer to the normal-form game of price competition in the payoff matrix below.

		Firm B
		Low Price	High Price
Firm A	Low Price	0, 0	50, -10
	High Price	-10, 50	20, 20

If the low price / low price payoffs for both players are 30 (instead of 0), is this game a prisoners' dilemma?

A. YES

B. NO

Answer 1

Now payoff is :

		Firm B
		Low Price	High Price
Firm A	Low Price	30 , 30	50 , -10
	High Price	-10 , 50	20 , 20

No this is not a Prisoner's dilemma.

We can see that whatever Firm B chooses Firm A will choose Low price and Hence Low price is dominant strategy of firm A and We can also see that whatever Firm A chooses Firm B will choose Low price and Hence Low price is dominant strategy of firm B.

Hence Each firm will receive 30. which is Pareto optimal. There is no other outcome that will result in benefit of the both Firms , In every other outcome in order to increase one firm's payoff we have to decrease other firm's payoff. Hence it is not a prisoner's dilemma.

In Prisoner's dilemma there If both cooperate then both can increase their payoff , but it is not such case here If (Low Price , Low price) = (30 , 30).

Hence This is not a prisoner's dilemma.