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Oligopoly (Mobile-Enabled) DOD Assignments
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6. Using a payoff matrix to determine the equilibrium outcome
Suppose there are only two firms that sell tablets: Padmania and Capturesque. 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 tablets.
Capturesque Pricing High Low
High 11, 11 2, 15
Padmania Pricing Low 15, 2 8, 8
For example, the lower-left cell shows that if Padmania prices low and Capturesque prices high, Padmania will earn a profit of $15 million, and Capturesque will earn a profit of $2 million. Assume this is a simultaneous game and that Padmania and Capturesque are both profit-maximizing firms.
If Padmania prices high, Capturesque will make more profit if it chooses a low price, and if Padmania prices low, Capturesque will make more profit if it chooses a high price.
If Capturesque prices high, Padmania will make more profit if it chooses a low price, and if Capturesque prices low, Padmania will make more profit if it chooses a high price.
Considering all of the information given, pricing high is a dominant strategy for both Padmania and Capturesque.
If the firms do not collude, what strategies will they end up choosing?
- Padmania will choose a high price, and Capturesque will choose a low price.
- Padmania will choose a low price, and Capturesque will choose a high price.
- Both Padmania and Capturesque will choose a low price.
- Both Padmania and Capturesque will choose a high price.
True or False: The game between Padmania and Capturesque is an example of the prisoner's dilemma.
- True
- False
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