Consider the following oligopoly situation: Two firms must make a simultaneous c
ID: 1127937 • Letter: C
Question
Consider the following oligopoly situation: Two firms must make a simultaneous choice between two sales strategies: a high price strategy or a low price strategy. Payoffs for the combinations of strategies are given below: 5. Firm B Strategs Firm A Payoff Firm B Payoff -2 Low Price Low Price Low PriceH High Price Low Price High Price HighPrice 3 High Price 6 a) Does Firm A have a dominant strategy? No b) Does firm B have a dominant strategy? N c) What is the Nash Equilibrium of this game? L . . HExplanation / Answer
When Firm B opts for a low price strategy, firm A would also choose a low price strategy as it would give a higher payoff to the latter. However, when Firm B opts for a high price strategy, firm A would also choose a high price strategy as it would give a higher payoff to the latter. Therefore, there is no dominant strategy for firm A as it would change its decision based on firm B's decision.
When Firm A opts for a low price strategy, firm B would also choose a low price strategy as it would give a higher payoff/minimum loss to the latter. However, when Firm A opts for a high price strategy, firm B would also choose a high price strategy as it would give a higher payoff to the latter. Therefore, there is no dominant strategy for firm B as it would change its decision based on firm A's decision.
It can be seen from the information given above that both firms charging a low price or both firms charging a high price would be a Nash equilibrium as neither would want to change their strategy given the choice made by the other firm.
Firm B Low Price High Price Firm A Low Price 3, -2 4, -3 High Price 2, 1 5, 6