Refer to the following formula for expected payoff:
Expected payoff = [Probability of rival matching × Loss from price cut] + [Probability of rival not matching × Gain from price cut]
Suppose the payoff for each of four strategic interactions is as follows:
a. If the probability of rivals matching a price reduction is 92 percent, what is the expected payoff of a price cut?
b. If the probability of rivals reducing price even though you don’t is 3 percent, what is the expected payoff of not reducing price?
c. Based on your answers to (a) and (b), should the firm cut its price?
Yes
No
There is not enough information to determine.
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