1. A market has only two sellers.

They are both trying to decide on a pricing

strategy. If both firms charge a high price, then each firm will experience a 5%
increase in profits. If both firms charge a low price, then each firm will
experience a 3% increase in profits. If irm 1 charges a high price and irm !
charges a low price, then irm 1 will experience a 1% increase in profits and
irm ! will experience a "% increase in profits. If irm ! charges a high price
and irm 1 charges a low price, then irm ! will experience a !% increase in
profits and irm 1 will experience a #% increase in profits.
$i% &onstr'ct a payoff matrix for this game.
(I)( *+,
(I)( 5,5 1,"
*+, #,! 3,3
(ii) Determine whether each firm has a dominant strategy and, if it does, identify the
strategy.
If A plays HIGH then B plays LO (!"#)
If A plays LO then B plays LO ($"%)
&o Low is dominant strategy for B
If B plays HIGH then A plays LO ('"#)
If B plays LO then A plays LO ($"()
&o Low is dominant strategy for A
(iii) Determine the optimal strategy for each firm.
LO is dominant and th)s, optimal strategy for *oth
(i+) Determine the ,ash e-)ili*ri)m.
It is Low, LO with payoff $. to *oth
(+) Is this a prisoners/ dilemma0 How do yo) 1now0
23&
Beca)se they wo)ld *oth want #,# *)t that is not possi*le as Low is their dominant strategy for
*oth. 4hey end )p with least profits d)e to non coll)sion.