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

Question

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 HighLow High 11, 11 21 Low 18,2 10, 10 Padmania Pricing example, the lower-left cell shows that if Padmania prices low and Capturesque prices high, Padmania will earn a profit of $18 million, and Capturesque will earn a profit of $2 million. Assume this is a simultaneous game and that Padmania and Captures firms que are both profit-maximizing price, and if padmania prices low, Capturesque will make more profit if it chooses a price. price, and if Capturesque prices low, Padmania vill make more If Capturesque prices high, Padmania will make more profft if it chooses a profit if it chooses price Considering all of the information given, pricing low . firms do not collude, what strategies will they end up choosing? Padmania will choose a high price, and Capturesque will choose a low price Both Padmania and Capturesque will chosse a low price. Padmania ill choose a low price, and Capturesque will choose a high price Both Padmania and Capturesque will choose a high price True or Failse The game between Padmania and Capturesque is not an example of the prisoners dilemma True False rade it Now

Explanation / Answer

(a)

If Padmania prices high, Capturesque will make more profit if it chooses a Low price (Since 18 > 11), and if Padmania prices low, Capturesque will make more profit if it chooses a Low price (Since 10 > 2).

(b)

If Capturesque prices high, Padmania will make more profit if it chooses a Low price (Since 18 > 11), and if Capturesque prices low, Padmania will make more profit if it chooses a Low price (Since 10 > 2).

(c)

Pricing low is a dominant strategy for both.

[Reason: Both firms will choose Low price, irrespective of the pricing strategy chosen by the other firm]

(d)

If firms do not collude,

- Both will choose a Low price.

(e) TRUE

If both firms do not collude, they will both choose Low price, therefore each will earn payoff of 10 each (For (Low, Low) cell). But if they collude, each firm will be able to gain higher payoff of (11, 1) (For (High, High) cell).

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