Using a payoff matrix to determine the equilibrium outcome Suppose there are onl

Question

Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell smart phones, Flashfone and Pictech. The following payoff matrix 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 $13 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. If Flashfone prices high, Pictech will make more profit if it chooses a price, and if Flashfone prices low, Pictech will make more profit if it chooses a price. If Pictech prices high, Flashfone will make more profit if it chooses a price, and if Pictech prices low, Flashfone will make more profit if it chooses a price. Considering all of the information given, pricing low a dominant strategy for both Flashfone and Pictech. If the firms do not collude, what strategies will they end up choosing? Both Flashfone and Pictech will choose a high price. Flashfone will choose a low price and Pictech will choose a high price.

Explanation / Answer

1. flashfone HIGH(11) Pictech will make more profit iif it pricesLOW ( 13 mil). If Flashfon eprices LOW (13) then Oictech will make more profit if it rpices LOW (13)

2. If Pictech prices HIGH ( 11 mil) flashfon will price LOW (13mil). If flashof price LOW (13 mil) the pictech will price HIGH (11 mil)

3. The dominant strategy for BOTH will be to price LOW ( 1O mil each)

4. If they do not collude both will end up choosing HIGH PRICE ( 11 MIL EACH)

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