Suppose two companies, say BK (Burger King) and MD
(Mac Donald's), are involved in price competition for
burgers that they sell, as given in the adjacent figure. If BK
and MD both sell at $7, both earn a profit of $15m. If BK
sells at $5 and MD sells at $7, then BK earns $30m and
MD only $5m, and vice versa. Finally, if both charge $5m,
they both earn $10m.
This is a situation of strategic interdependence because the
pricing decisions of each of the players has an effect on the
payoff of the other. Answer the following questions: