Consider a market with two firms, Target and Wal-Mart, that sell cDs in their mu

Question

Consider a market with two firms, Target and Wal-Mart, that sell cDs in their music department. Both stores must choose whether to charge a high price ($30) or a low price ($13) for the new Miley Cyrus CD. These price strategies with corresponding profits are depicted in the payoff matrix to the right. Target's profits are in red and Wal-Mart's are in blue. Target's dominant strategy is to pick a price of $ 13 Wal-Marts dominant strategy is to pick a price of s Target Price $30 Price -$13 10 Price $30 10,000$13 Wal -Mart 500 Price $13 $2.500

Explanation / Answer

A dominant strategy is a situation where the firm is well off no matter what the other player's strategy in the market is. Here, if Wallmart chooses to charge a low price its return will be $13,000 and $5,500 which is more than the return if he chooses a high price. The answer is $13.

(same for target, dominant strategy for both is $13. )  

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