10. Two firms, Atlantis and Bacchus, compete primarily by price. Each firm choos

Question

10. Two firms, Atlantis and Bacchus, compete primarily by price. Each firm chooses either a high price or a low price simultancously. The following payoff table shows the profit each firm would earn in each of the four possible decision combinations. Bacchus price High Low Atilantis High price Low $10,000, $10,000 $5,000, $20,000 20,000, $5,000 $8,000, $8,000 (a) Does Atlantis have a dominant strategy? Why or why not? (b) Does Bacchus have a dominant strategy? Why or why not? (c) Does Atlantis have a dominated strategy? Explain why or why not. (d) Does Bacchus have a dominated strategy? Explain why or why not. (e) What is the outcome of this simultancous decision? Why? (0 Is this decision situation a prisoners' dilemma? Explain why or why not. (g) Is cell C strategically stable? Explain why or why not (h) Is cell D strategically stable? Explain why or why not.

Explanation / Answer

a) Yes Atlantis has a dominant strategy i.e. choose a low price because no matter what strategy is chosen by Bacchus, Atlantis would make a higher profit when this strategy is chosen.

b)  Yes Bacchus has a dominant strategy i.e. choose a low price because no matter what strategy is chosen by Atlantis, Bacchus would make a higher profit when this strategy is chosen.

c) and d) Pricing high is a dominated strategy for both the firms. ( Pricing low would provide a higher profit to the firms no matter what the other firm chooses to do)

e) Both firms would choose to price low. (this is the dominant strategy for both of them)

f) Yes, this is an example of prisoners' dilemma, the chosen outcome is not efficient. (both firms would be better off if both of them choose to price high)

g) No, Bacchus would want to move to cell D because it would make a higher profit in comparison to cell C.

h) Yes, because no firm has any incentive to leave the strategy which has been chosen. (one of the firms would make a lower profit when it chooses any other cell)

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