8. Using a payoff matrix to determine the equilibrium outcome
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.
For example, the lower-left cell shows that if Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $20 million and Pictech will earn a profit of $3 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 low price, and if Flashfone prices low, Pictech will make more profit if it chooses a low price.
If Pictech prices high, Flashfone will make more profit if it chooses a low price, and if Pictech prices low, Flashfone will make more profit if it chooses a low price.
Considering all of the information given, pricing low is or 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?
Both Flashfone and Pictech will choose a low price.
Both Flashfone and Pictech will choose a high price.
Flashfone will choose a high price and Pictech will choose a low price.
Flashfone will choose a low price and Pictech will choose a high price.
True or False: The game between Flashfone and Pictech is not an example of the prisoners’ dilemma.
True
False
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