Suppose there are only two firms that sell smartphones, Flashfone and Pictech. T

Question

Suppose there are only two firms that sell smartphones, Flashfone and Pictech. The payoff matrix that follows shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its phones. For example, the lower-left cell shows that if Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $9 million and Pictech will earn a profit of $2 million Assume this is a simultaneous game and that Flashfone and Pictech are both profit-maximizing firms. Pictech High Price 8, 8 Low Price High Price 2, 9 Flashfone Low Price 9, 2 If Flashfone prices high, Pictech will make more profit if it chooses a Pictech will make more profit if it chooses a price, and if Flashfone prices low, price If Pictech prices high, Flashfone will make more profit if it chooses a Flashfone will make more profit if it chooses a price, and if Pictech prices low price. Considering all of the information given, pricing high Pictech. a dominant strategy for both Flashfone and If the firms do not collude, what strategies will they end up choosing? O Both Flashfone and Pictech will choose a low price O Flashfone will choose a high price and Pictech will choose a low price O Both Flashfone and Pictech will choose a high price. O Flashfone will choose a low price and Pictech will choose a high price True or False: The game between Flashfone and Pictech is not an example of the Prisoners' Dilemm. O True Q False

Explanation / Answer

a) If flash phone prices high, Pictech will earn more profit if they choose to set a low price. If flash phone charges low then also PIctech will keep the price low if they want to keep the profit high. (in both the cases pictech will set a low price.)

b) IF Pic tech prices high Flash phone will charge low to make more profit. If Pictech prices low then also pic tech will charge a low price to make more profit.

c) Pricing high is not a dominant strategy for both flash phone and Pictech.

d) If they do not collude they will end up choosing low price each. The answer is "A".

e) "False"

The game is an example of prisoners dilemma.  

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