Mac Donald%u2019s
ID: 2701747 • Letter: M
Question
Burger King and McDonald's Scenario
Burger King and McDonald%u2019s are situated on opposite corners of a downtown intersection. Burger King and McDonald%u2019s compete on the basis of the prices they set for their burger, fry, and soda combination meals. Every Monday, Burger King and Mc- Donald%u2019s simultaneously choose their combo meal prices, which will remain in effect for the rest of the week.
Burger King and McDonald%u2019s consider only two possible prices: a low price of $3.50 or a high price of $4.50 for their combination meals. The weekly profit from each of the four possible combinations of decisions is given in the following table:
Low ($3.50)
High ($4.50)
A
$3,000, $5,500
B
$6,500, $5,000
High ($4.50)
C
$2,000, $9,000
D
$5,000, $8,000
Payoffs in dollars of weekly profit.
Explain the statements below.
a. The pricing decision facing Burger King and McDonald%u2019s is a prisoners%u2019
dilemma.
b. Cooperation between Burger King and McDonald%u2019s occurs in cell D of the
payoff table. The non-cooperative outcome occurs in cell A.
c. Cell B represents cheating by McDonald%u2019s, while cell C represents cheating by
Burger King.
d. If Burger King and McDonald%u2019s make their pricing decision just one time, they
will likely end up in cell A.
e.Burger King can credibly threaten to punish McDonald%u2019s with a retaliatory price
cut.
f.McDonald%u2019s can credibly threaten to punish Burger King with a retaliatory price
cut.
Burger King%u2019s price
Low ($3.50)
High ($4.50)
priceLow ($3.50)
A
$3,000, $5,500
B
$6,500, $5,000
High ($4.50)
C
$2,000, $9,000
D
$5,000, $8,000
Payoffs in dollars of weekly profit.
Explanation / Answer
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