Two firms, firm A and B are in a duopoly market, trying to decide what price to
ID: 1196474 • Letter: T
Question
Two firms, firm A and B are in a duopoly market, trying to decide what price to
charge. In particular, each firm could charge either a high price or a low price.
Profits generated from each combination of pricing strategy are represented in the
payoff matrix below.
Firm A
Firm B
High
Low
High
100, 100
30, 120
Low
120,30
70, 70
a) What is the best response for firm B if firm A plays High? Low?
b) What is the best response for firm A if firm B plays High? Low?
c) What is the equilibrium outcome (meaning, in equilibrium what pricing strategy
are each firm going to use)?
Firm A
Firm B
High
Low
High
100, 100
30, 120
Low
120,30
70, 70
Explanation / Answer
a) The best response for firm B if firm A plays High, is play Low and if firm A plays Low, is play High
b) The best response for firm A if firm B plays High, is play Low and if firm B plays Low, is play High
c) Neither firm has a dominant strategy. Each firm is better off doing the opposite of its rival. There are two Nash equilibrium. Either firm B plays low and firm A plays high, or firm B plays high and firm A plays low.
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