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Homework answers / question archive / Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell smartphones: Flashfone and Pictech
Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell smartphones: 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 High 11, 11 2, 15 Flashfone Pricing 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 price, and if Flashfone prices low, Pictech will make more profit if it chooses a price If Pictech prices high, Flashfone will make more profit if it chooses a price, and if Pictech prices low, Flashfone will make more profit if it chooses a price. Considering all of the information given, pricing high a dominant strategy for both Flashfone and Pictech.
If the firms do not collude, what strategies will they end up choosing? Flashfone will choose a high price, and Pictech will choose a low price. O Flashfone will choose a low price, and Pictech will choose a high price. Both Flashfone and Pictech will choose a high price. Both Flashfone and Pictech will choose a low price. True or False: The game between Flashfone and Pictech is an example of the prisoners' dilemma. True False
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 low price.
Considering all of the information given, pricing high is not a dominant strategy for both Flashfone and Pictech.
If the firms do not collude, both Flashfone and Pictech will choose a low price. So, option 4 is the correct answer.
It is true that the game between Flashfone and Pictech is an example of prisoners' dilemma. This is because, if both the firms collude, they would be able to make higher profits than what they would make by making decisions independently.
