Consider a market with two firms. HP and Dell that sell printers. Both companies

Question

Consider a market with two firms. HP and Dell that sell printers. Both companies must chose whether to charge a high price ($400) or a low price ($300) for their printers.
These price strategies with corresponding profits are depicted in the payoff matrix. HPs profits are in red and deals are in the blue. Suppose HP and Dell are initially at the games Nash equilibrium.
Then, HP and Dell advertise that they will match any lower price up there competitors. For example, if HD charges $300 , than Dell will match the price and also charge $300.
What effect will matching prices have in profits (relative to the Nash equilibrium without price matching)?
HP’s profit will change by $ ____ and Dells profits will change by $_____?
HP Price = $400 Price = $300 $60 $5 Price = $400 $60 $70 Dell $70 $55 Price = $300 $5 $55

Explanation / Answer

When D charges 400, HP charges 300

When D charges 300, HP charges 300

When H charges 400, D charges 300

When H charges 300, D charges 300

Nash equilibrium: (Low, Low) giving payoff (300,300)

Collusive matching prices: (High, High) will give payoff of (400,400)

HP’s profit will change by $100 and Dells profits will change by $100

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