Question

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.
Pictech Pricing
High Low
Flashfone Pricing High 11, 11 2, 15
Low 15, 2 8, 8
For example, the lower, left cell shows that if Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $15 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 (high,low) _____ price, and if Flashfone prices low, Pictech will make more profit if it chooses a(high,low)_______ price.

If Pictech prices high, Flashfone will make more profit if it chooses a(high,low)______price, and if Pictech prices low, Flashfone will make more profit if it chooses a (high,low) ______ price.

Considering all of the information given, pricing high (is, is not) ______ a dominant strategy for both Flashfone and Pictech. (Note: A dominant strategy is a strategy that is best for a player regardless of the strategies chosen by the other players.)

If the firms do not collude, which strategy will they end up choosing?

Flashfone will choose a low price and Pictech will choose a high price.

Flashfone will choose a high price and Pictech will choose a low price.

Both Flashfone and Pictech will choose a low price.

Both Flashfone and Pictech will choose a high price.

True or False: The game between Flashfone and Pictech is an example of the prisoners' dilemma.

True

False

Answer 1

Answer:

The question is based on the economics theory named the game theory. Economists frequently use it to analyze the outcomes for adversary firms.

Explanation:

To solve this problem we need to pay attention to the best outcome for each firm given the choices of the other firm. So, when Pictech chooses a higher price, Flashfone should choose between a high or low price. The firms must keep choosing until they run out of options.

To have a dominant strategy, the firms should always choose a low price.

Based on the game theory:

If Flashfone prices high, Pictech will make more profit if it chooses a (high,low) __low___ price, and if Flashfone prices low, Pictech will make more profit if it chooses a(high,low)____low___ price.

If Pictech prices high, Flashfone will make more profit if it chooses a(high,low)_____low_price, and if Pictech prices low, Flashfone will make more profit if it chooses a (high,low) ___low___ price.

Considering all of the information given, pricing high (is, is not) __is not____ a dominant strategy for both Flashfone and Pictech.

They will end up choosing the low price strategy. Both Flashfone and Pictech will choose a low price.

The answer is true, because the prisioner's dilema is a game were both parties know that the outcome can be worse for both. So they rather play in a way that is better for their interests. In the firms' case, they could have choose higher prices, but  they didn't because each of them intented to charge a lower price and outsell the other firm. Meaning that, the one with the lower price, would sell more smartphones.