Question

Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell Blu-ray players, Movietonia and Videotech. 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 players. For example, the lower-left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $15 million and Videotech will earn a profit of $3 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profit-maximizing firms. If the firms do not collude, what strategies will they end up choosing? True or False: The game between Movietonia and Videotech is an example of the prisoners' dilemma.

Answer 1

Answer:

According to the payoff matrix in the question:

If Movietonia chooses to price high then Videotech will prefer to price low as 15>11 and if Movietonia chooses to price low even then Videotech will prefer to price low as 8>2.

Thus Videotech has a dominant strategy- of pricing low.

------------------------------------------------------------------------------------------------------------

If Videotech prices high, then Movietonia prefers to price low as 15>:11 and if Videotech prices low even then .Movietonia prefers low pricing as 8>2.

Thus Movietonia has a dominant strategy of pricing low.

-----------------------------------------------------------------------------------------------------------

In case both do no collude. both will have pricing low as a dominant strategy. Both will and up choosing a low price.

-----------------------------------------------------------------------------------------------------------

The above situation is an example of prisoner's dilemma because if both of them cooperate and price high they end up earning higher payoffs than without cooperating.