4 Competition or Collusion Mario and Luigi are competing piz

4. Competition or Collusion. Mario and Luigi are competing pizza makers. They compete in prices, and each must decide what price to choose: High, Medium, or Low. Higher prices mean more revenue but lower sales. Numbers in the table below are profits Luigi High Medium Low High 60,60 36,70 36,35 arno Medium 70,3650,50 30,35 Low 35,3635,3025,25 a. Find the Nash equilibrium of this game. b. What would the collusive outcome be? Is collusion a sustainable equilibrium?

Solution

a) The Nash Equilibrium of this game is (50,50) i.e., (Medium,Medium) because when Mario i.e., the first player chooses medium, Luigi, the second player also chooses medium.

Simillary, when Luigi chooses medium, Mario also chooses medium.

b) The collusive outcome is (High,High) i.e., (60,60) because both the players have higher payoffs than the payoffs of nash equilibrium.

The collusion is not a sustainable equilibrium because both the players have incentives to deviate.