Consider a small town that is served by two grocery stores, White and Gray. Each
ID: 1129176 • Letter: C
Question
Consider a small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sunday or whether it will close on that day. Monthly payoffs for each strategy pair are as shown in the table below.
Which firm is the most profitable in this market?
Does Gray have a dominant strategy?
Is there a dominant equilibrium for both firms?
Is the dominant equilibrium profit-maximizing?
Is this an example of the prisoner's’ dilemma? Explain.
Gray's Choices Open Sundays $4000 [--. Closed Sundays $2,000 Open Sundays $4000 $12,000 White's Choices $12,000 $8,000 Closed Sundays $2,000 $8,000Explanation / Answer
1) Both firms would earn equal profit in this market. (Nash equilibrium payoffs - $4000 each)
2) Yes, Gray has a dominant strategy - Open on Sundays (No matter what White chooses, Gray earns a higher payoff on following this strategy)
3) Yes, both firms have a dominant strategy - Open on Sundays (same reasoning as above)
4) No, the dominant equilibrium is not profit maximizing, they can both earn a higher profit if they collude and remain closed on Sundays.
5) Yes, this is an example of Prisoner's dilemma as both firms end up at a non-efficient outcome in comparison to an efficient outcome where both collude and earn a higher payoff as pointed out in the previous part.