Refer to the payoff matrix at right for the profits (in $ millions) of two firms (A and B) and two pricing strategies (high
and low). Which of the following is the outcome of the dominant strategy without cooperation? A. Firm A chooses the high price while firm B chooses the low price. B. Both firm A and firm B choose the low price. C. Both firm A and firm B choose the high price. D. Firm A chooses the low price while firm B chooses the high price.
1 answer:
Answer: B. Both firm A and firm B choose the low price.
Explanation:
Both firm A and Firm B will choose the low price and make profits of $3 if there is no cooperation.
This is because at any other price, the other firms could go with the low strategy and get more profit.
For instance, if Firm A is using a low price and Firm B is using a high price then Firm A makes profit of $10 whilst B makes $1.
Conversely, if Firm B charges a low price and A a high price, A will make paltry profits of $1 while B would make $10.
Their best option therefore is to both pick the low price and make $3.
If they were cooperating they could both charge a high price and make $5 each.
Your question was incomplete so I attached the payoff matrix.
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