Question

9. Using a payoff matrix to determine the equilibrium outcome

Suppose there are only two firms that sell Blu-ray players, Movietonia and Videotech. 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 players.

		Videotech Pricing
		High	Low
Movietonia Pricing	High	11, 11	2, 15
	Low	15, 2	8, 8

For example, the lower, left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $15 million and Videotech will earn a profit of $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profit-maximizing firms.

If Movietonia prices high, Videotech will make more profit if it chooses a (HIGH/LOW)   price, and if Movietonia prices low, Videotech will make more profit if it chooses a (HIGH/LOW) price.

If Videotech prices high, Movietonia will make more profit if it chooses a (HIGH/LOW)  price, and if Videotech prices low, Movietonia will make more profit if it chooses a (HIGH/LOW)  price.

Considering all of the information given, pricing low (IS/IS NOT)   a dominant strategy for both Movietonia and Videotech.

If the firms do not collude, which strategy will they end up choosing?

Movietonia will choose a high price and Videotech will choose a low price.

Both Movietonia and Videotech will choose a low price.

Movietonia will choose a low price and Videotech will choose a high price.

Both Movietonia and Videotech will choose a high price.

True or False: The game between Movietonia and Videotech is not an example of the prisoner's dilemma.

True

False

Answer 1

If Movietonia prices high, Videotech will make more profit if it chooses a (LOW)   price, (as 15>11 million dollars)

and if Movietonia prices low, Videotech will make more profit if it chooses a (LOW)price.(as 8>2 million dollars)

If Videotech prices high, Movietonia will make more profit if it chooses a (LOW)  price,(as 15>11 million dollars)

and if Videotech prices low, Movietonia will make more profit if it chooses a (LOW)  price.(as 8>2 million dollars)

Considering all of the information given, pricing low (IS)   a dominant strategy for both Movietonia and Videotech.

Reason- Whatever the other player chooses, both firms always choose low pricing, hence low pricing ia a dominant strategy.

If the firms do not collude, which strategy will they end up choosing?

Both Movietonia and Videotech will choose a low price.

Reason- Since Low pricing is a dominant strategy for both firms.

True or False: The game between Movietonia and Videotech is not an example of the prisoner's dilemma.

False

Reason- It is an example of prisoners dilemma. If the firms onky think about themselves they end up getting low profit by setting low prices.($8 million). If they collude they can both set high prices and earn more profit.($11 million).