Gillig and New Flyer make buses. They play a strategic game when simultaneously

Question

Gillig and New Flyer make buses. They play a strategic game when simultaneously deciding prices. If Gillig has low prices and New Flyer has high prices, then Gillig would earn $16 million in profit and New Flyer would earn $18 million in profit.If Gillig and New Flyer both have low prices, then Gillig would earn $11 million in profits and New Flyer would earn $21 million in profit. If Gillig and New Flyer both have high prices, then Gillig would earn $14 million in profits and New Flyer would earn $22 million in profit. If Gillig has high prices and New Flyer has low prices, then Gillig would earn $9 million in profit and New Flyer would earn $23 million in profit.

What is the Nash equilibrium?

Gillig and New Flyer both set low prices.

Gillig sets low prices and New Flyer sets high prices.

Gillig and New Flyer both set high prices.

Gillig sets high prices and New Flyer sets low prices.

A:

Gillig and New Flyer both set low prices.

B:

Gillig sets low prices and New Flyer sets high prices.

C:

Gillig and New Flyer both set high prices.

D:

Gillig sets high prices and New Flyer sets low prices.

Explanation / Answer

(All values are in $ mn)

As can be seen above, New Flyer would charge a lower price no matter what decision is taken by Gillig (he gets a higher profit by choosing this alternative). Similarly, Gillig would also choose to charge a lower price.

Option A is correct (Payoff is $21mn and $11mn)

Gillig Low Prices High Prices New Flyer Low Prices 21,11 23,9 High Prices 18,16 22,14

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