4. Using a payoff matrix to determine the equilibrium outcome Suppose there are

Question

4. Using a payoff matrix to determine the equilibrium outcome 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 Low High 11, 11 2, 18 Low 18,2 10. 10 Padmania Pricing For 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 Capturesque are both profit-maximizing firms. If Padmania prices high, Capturesque will make more profit if it chooses a Padmania prices low, Capturesque will make more profit if it chooses a price, and if price. If Capturesque prices high, Padmania will make more profit if it chooses a Capturesque prices low, Padmania will make more profit if it chooses a price, and if price. a dominant strategy for both Considering all of the information given, pricing high Padmania and Capturesque. If the 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 choose a high price. Padmania will choose a low price, and Capturesque will choose a high price Both Padmania and Capturesque will choose a low price. True or False: The game between Padmania and Capturesque is an example of the prisoners' True False

Explanation / Answer

a) If Padmania prices high, Capturesque will make more profit if it chooses a "Lower" price, and if Padmania prices low, Capturesque will make more profit if it chooses a "Lower" price. Because of Padmania charges high and Capturesque charges lower he will end up getting more consumers and make a profit of 18 Padmania, on the other hand, will only make a profit of 2. But by keeping low both will make a profit of 10 each.

b) If Capturesque prices high, Padmania will make more profit if it chooses a "Lower" price, and if Capturesque prices low Padmania will make more profit if it chooses a "Lower" price. Doing so will send all the consumers in the market to Padmania and he will make a profit of 18, capturesque only 2. But if both charges low both make a profit of 10 each.

c) considering all situation pricing high "is not" a dominant strategy for both the firms operating. Both benefit if they keep the price low, no matter what price other are keeping. So, keeping price low is the dominant strategy.

d) If the firms do not collude they will end up choosing "a lower price" and make an equal profit.

e) This example given above is a "prisoner dilemma" the answer is true.

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