Consider the following game played between two microwave meal producers, Wanson

Question

Consider the following game played between two microwave meal producers, Wanson (W) and Stuffer (S). Each firm can choose either to charge a low price (1) or high price (h). The following table shows the payoff matrix for the two firms in terms of their profits in million dollars represented by ( ) in each cell: Stuffer low price (1) (1.1) (0,3) high price (h) (3,0) (2,2) low price (1) Wanson high price (h) (a) Find the Nash equilibrium strategy(ies). (b) Is this an example of a prisoners' dilemma game?

Explanation / Answer

On the other hand, if Stuffer chooses to charge a low price then Wanson charges a low price too and if Stuffer charges a higher price Wanson still charges low price. So irrespective of what Stuffer charges Wanson always prefers to charge a low price as his payoff from charging low price is greater than that from high price. Hense the nash equilibrium strategy in this case is that both charge a low price and receive (1,1) as payoff.

This is an prisoner dilemma’s game since both Wanson and Stuffer could have charged high price and received a higher payoff of (2,2) however, they settle for low price and receive payoff less than what they could have from charging high price.

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