7 Two companies Budweiser and Miller are the only two beer c

7. Two companies, Budweiser and Miller, are the only two beer companies selling a product in a small town. Each company must simultaneously display their prices, choosing between a high price and low price. The profits each firm can potentially earn are displayed in the payoff matrix displayed below Budweiser Decisions High Price M: $6,000 B: $9,000 M: $9,000 B: $5,000 Low Price M: $2,000 B: $12,000 M: $4,000 B: $6,000 High Price Miller Decisions Low Price a. What is Miller\'s most likely decision (what is their dominant strategy)? b. What is Budweiser\'s most likely decision (what is their dominant strategy)? What is the most expected outcome (what is the Nash equilibrium)? How much will each firm profit? c. d. If Miller announces a price match guarantee, so if Budweiser charges a lower price than Miller, Miller\'s price will automatically match the lower price. Assuming Budweiser is aware of this guarantee, how much will both firms profit?

Solution

ans:

a. miller dominant strategy is low price because no matter what price budweiser charges , miller\'s profit will be maximum only when it charges low price as 9000>6000 and 4000>2000

b. budweiser dominant strategy is low price because no matter what price miller charges , miller\'s profit will be maximum only when it charges low price as 12000>9000 and 6000>5000

c. nash equlibrium will be low price , low price . this is because when miller charges low price budweiser payoff will be max when he charges low price ; when miller charges high price budweiser payoff will be max when he charges low price ; when budweiser charges low price miller payoff will be max when he charges low price and lastly, when budweiser charges high price miller payoff will be max when he charges low price . thus , what we see is that both will play their dominant strategy and that will be the nash equilibrium.

their profit will be miller = $ 4000 , budweiser = $ 6000

d. if this is the case then they are two possible result either both charges high price or both charges low price .

in high price case their profit will be: miller = $6000, budweise = $9000

in low price case profit : miller = $4000 , budweiser = $6000