Assume that Dunkin Donut and Starbucks can each play strategies of lowering pric

Question

Assume that Dunkin Donut and Starbucks can each play strategies of lowering prices or introducing new products. The profits for each firm, given the strategy of their rival are shown in the matrix below. Is there a Nash equilibrium strategy in this market and if so what is that Nash equilibrium. Fully explain how you arrived at your conclusion. Starbucks Lower Price New product Lower price 40 25 Dunkin Donuts 30 50 60 70 New Product 20 40. Please include an extended matrix to go along with the strategies.

Explanation / Answer

Nash equilibrium is a strategy profile such that for each player given strategy, it is best response. Nash equilibrium is a set of strategies such that each player is doing their best given the strategy of other player.

Dunkin Donuts will always choose low price because payoff by charging low price is greater than the payoff by introducing New product.

If Dunkin chooses to charge low price then the best response of Starbucks is to charge Low price because payoff of 40 is better than the payoff of 25 for Starbucks.

If Starbucks chooses to charge low price then the best response of Dunkin is to charge low price because payoff of 30 is better than payoff of 20.

So, (Low price; Low price) is the Nash Equilibrium.

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