A market has only two sellers. They are both trying to decide on a pricing strat
ID: 1122759 • Letter: A
Question
A market has only two sellers. They are both trying to decide on a pricing strategv. If both firms charge a high price, then each firm will experience a 5 percent decrease in profits. If both firms charge a low price, then each firm will experience a 2 percent increase in profits. If Firm 1 charges a high price and Firm 2 charges a low price, then Firm 1 will experience a 1 percent increase in profits and Firm 2 will experience a 4 percent increase in profits. If Firm 2 charges a high price and Firm 1 charges a low price, then Firm 2 will experience a 3 percent increase in profits and Firm 1 will experience a 4 percent increase in profits. Firm 2 High PriceLow Price High Price(-5.-5) Low Price irm 1 (4,3) (2.2) (1) Determine whether each firm has a dominant strategy and, if it does, identify the strategy. (2) Determine the optimal strategy for each firnm (3) Determine the Nash equilibrium (4) Is this a prisoners' dilemma? How do you know?Explanation / Answer
1) Given firm 1 chooses high price, best option of firm 2 is to choose low price. Given Firm 1 chooses low price, best option for firm 2 is to choose high price. so firm 2 does not have a dominant strategy. Given firm 2 chooses high price, best response of firm 1 is to choose low price. Given firm 2 chooses low price, best response of firm 1 is to choose low price. So, charging low price is the dominant strategy of firm 1.
2) Optimal strategy of firm 1 is to charge a low price which gives him higher payoff. Given firm 1 chooses low price, Optimal strategy of firm 2 is to large a high price.
3) The nash equilibrium is that firm 1 charges low price and firm 2 charges high price.
4) The prisoner's dilemma is a paradox in decision making in which two individuals acting in their own self-interest pursue a course of action that does not result in the ideal outcome. No this is not prisoner' dilemma as the two firms reach a point where their payoffs are maximised.
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