Consider a small town that has two grocery stores from which residents can choos

Question

Consider a small town that has two grocery stores from which residents can choose to buy a loaf of bread. The store owners each must make a decision to set a high bread price or a low bread price. The payoff table, showing profit per week, is provided below. The profit in each cell is shown as (Store 1, Store 2). Store 2 Low Price Low Price High Price High Price (800, 100) (650, 650) Store 1 (500, 500) (100, 800 2. Does store 1 have a dominant strategy? Store 2? Explain 3. What will happen if the stores collude? 4. What will happen if they plan to collude and store 1 cheats and store 2 does not? 5. Are there any stable Nash equilibria?

Explanation / Answer

2. The store 1 and store 2 both have the dominant strategy of low price. Both will choose low price. Suppose if store 2 lower the price then store 1 will choose 500 over 100 in first column . so store 1 will also lower the price and the same is the case with store 2.

3. If both the stores collude then they both will lower there price for bread.

4. If they plan to collude and store 1 cheats then also store 2 will lower there price irrespective of store 1.

5. There nash equilibrim is (500 , 500)

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