Firm B Low price High price Low price 22 10 8 Firm A High pr

Firm B

                                       Low price                 High price

                Low price          (2,2)                        (10, -8)

Firm A    

              High price           (-8,10)                     (6,6)

What are the dominant strategies for Firm A and Firm B, respectively?

Select one:

a. (low price, high price).

b. (high price, low price).

c. (high price, high price).

d. (low price, low price).

What are secure strategies for firm A and firm B respectively?

Select one:

a. (low price, high price).

b. (high price, low price).

c. (high price, high price).

d. (low price, low price).

What are the Nash equilibrium strategies for firm A and B respectively?

Select one:

a. (low price, high price).

b. (high price, low price).

c. (high price, high price).

d. (low price, low price).

If this one-shot game is repeated 100 times, the Nash-equilibrium payoffs of the players will be ________________ each period.

Select one:

a. (2, 2)

b. (10, -8)

c. (-8, 10)

d.  (6, 6)

Solution

1. Dominant strategy is a strategy for a player i.e. best response to all strategy profile of other player.

Firm A and Firm B has the dominant strategy of charging low price because it gives them assured higher payoff as compared to other strategy. Payoff of Firm A is greater when it choose low price irrespective of decision of Firm B and vice-versa.

Answer is (Low price; Low price).

2. Secure strategy of both players is to choose low price because choosing higher price can give firm negative profit.

Answer is (Low Price; Low Price).

3. Nash equilibrium is a strategy profile such that for each player given strategy, it is best response. Nash equilibrium is a set of strategies such that each player is doing their best given the strategy of other player.

If Firm A chooses to charge low price then best response of Firm B is to choose low price because gain of 2 is better than loss of 8.

If Firm B chooses to charge low price then best response of Firm A is to choose low price because gain of 2 is better than loss of 8.

Therefore, (Low price; Low Price) is the Nash Equilibrium.

4. d) (6,6)

When game is repeated for 100 times then it leads to cooperation between firms and both firm will charge high price to earn more.