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Payoff Matrix and Prisoners Dilemma

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Firm B
(Problem 1) ___________
Low Price High Price
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

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 ...

Solution Summary

The solution determines the payoff matrix and the prisoners dilemma.

See Also This Related BrainMass Solution

Solution contains explanation of Nash Equilibrium in pure strategy, Prisoner's Dilemma and interrelation between both of them through an example.

Below is a payoff matrix for Intel and AMD. In each cell, the first number refers to AMD's profit, while the second is Intel's.
a. Is there a Nash Equilibrium(s)? Why or why not?
b. Is this an example of the Prisoner's Dilemma? Why or why not?

AMD Lower Price Same Price Higher Price
Lower Price -2, -6 6, -2 12,-15
Same Price 6,14 9, 8 15, 4
Higher Price -13,7 3, 9 16,20

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