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

Question

7. 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 HighLow 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 choosesa profit if it chooses a price, and if Padmania prices low, Capturesque will make more price. If Capturesque prices high, Padmania will make more profit if it chooses a profit if it chooses a price, and if Capturesque prices low, Padmania will make more price. Considering all of the information given, pricing high a dominant strategy for both Padmania and Capturesque.

Explanation / Answer

a. Low.

In this case it would ean $18.

b. Low.

In this case it would earn $10.

c. Low.

In this case it would ean $18.

d. Low

In this case it would ean $10.

e. IS NOT.

High price is not a dominant strategy. Price low is the dominant strategy for both.

f. Both will choose low price.

This is because in this case there is no tendency to deviate and also it is the dominant strategy.

g. True.

This is because both are maximising own profit and self interest without colluding.

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