1. McDonalds and Burger King have to make a pricing decision for their combo mea

Question

1. McDonalds and Burger King have to make a pricing decision for their combo meals. They can choose to price these meals at either $7 or $5. If they both price their meals at $7, they both stand to make $15 million. If one lowers its price to $5, revenues for the low priced restaurant will increase to $30 million while the higher priced alternative will only make $5 million. If both price at $5, the market would again be split at $10 million each.

a. Construct a pay-off matrix for this game.

b. According to this game, what should Burger King and McDonalds always do with respect to pricing to maximize revenues?

Explanation / Answer

a)

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b) According to this game, Burger king and McDonalds should always charge high price of $ 7 to maximize revenues.

                    Payoff Matrix McDonalds/Burger King Price charged $7 Price charged $ 5 Price charged $7 $15, $15 $5, $30 Price charged $ 5 $30, $5 $10, $ 10

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