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 Summary
The solution determines the payoff matrix and the prisoners dilemma.
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 ...
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