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Firm B
(Problem 1) _
Low Price High Price
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Low Price (1,1) (3, -1)
Firm A
High Price (-1,3) (2,2)
(a) From above (Problem 1), explain why the payoff matrix indicates that firms A and B face the prisoners’ dilemma?
Firm B
(Problem 2) _
Low Price High Price
Low Price (1,1) (3, -1)
Firm A
High Price (-1,3) (4,2)
(b)Do firms (in Problem 2) A and B face the prisoners’ dilemma? Why?
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Solution Preview
(a)
To figure out the prisoners’ dilemma, we need to find out the dominant strategy for each firm,
For Firm A, if Firm B uses Low Price, Firm A will look at two outcomes: (1, 1) or (-1, 3). Since 1 > -1, Firm A will select Low Price to obtain the (1, 1) state. Similarly, if Firm B uses High Price, Firm A will decide between two states: (3, -1) and (2, 2). Since 3 > 2, Firm A will again take Low Price as its strategy. As a result, the dominant strategy for Firm A is Low Price.
Now let’s consider Firm B, if Firm A takes Low Price, Firm B will …
