Suppose there are only two firms that sell smartphones, Flashfone and Pictech. The following payoff matrix/table shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its phones. Pictech Pricing High Low Flashfone Pricing High 10, 10 4, 12 Low 12, 4 9, 9 For example, the lower left cell shows that if Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $12 million and Pictech will earn a profit of $4 million. Assume this is a simultaneous game and that Flashfone and Pictech are both profit-maximizing firms. If Flashfone prices high, Pictech will make more profit if it chooses a price, and if Flashfone prices low, Pictech will make more profit if it chooses a price. If Pictech prices high, Flashfone will make more profit if it chooses a price, and if Pictech prices low, Flashfone will make more profit if it chooses a price. Considering all of the information given, pricing low a dominant strategy for both Flashfone and Pictech. If the firms do not collude, what strategies will they end up choosing? a ) Both Flashfone and Pictech will choose a low price. b) Flashfone will choose a high price and Pictech will choose a low price. c) Both Flashfone and Pictech will choose a high price. d) Flashfone will choose a low price and Pictech will choose a high price. True or False: The game between Flashfone and Pictech is an example of the prisoners' dilemma. True False

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter10: Monopolistic Competition And Oligopoly

Section: Chapter Questions

Problem 13PAE

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Using a payoff matrix/table to determine the equilibrium outcome

Suppose there are only two firms that sell smartphones, Flashfone and Pictech. The following payoff matrix/table shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its phones.

	Pictech Pricing
High	Low
Flashfone Pricing	High	10, 10	4, 12
Low	12, 4	9, 9

For example, the lower left cell shows that if Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $12 million and Pictech will earn a profit of $4 million. Assume this is a simultaneous game and that Flashfone and Pictech are both profit-maximizing firms.

If Flashfone prices high, Pictech will make more profit if it chooses a price, and if Flashfone prices low, Pictech will make more profit if it chooses a price.

If Pictech prices high, Flashfone will make more profit if it chooses a price, and if Pictech prices low, Flashfone will make more profit if it chooses a price.

Considering all of the information given, pricing low a dominant strategy for both Flashfone and Pictech.

If the firms do not collude, what strategies will they end up choosing?

a ) Both Flashfone and Pictech will choose a low price.

b) Flashfone will choose a high price and Pictech will choose a low price.

c) Both Flashfone and Pictech will choose a high price.

d) Flashfone will choose a low price and Pictech will choose a high price.

True or False: The game between Flashfone and Pictech is an example of the prisoners' dilemma.

True

False

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