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Nash Equilibrium

In a simple model of duopoly, two firms produce the same good, for which each firm charges either a low or a high price. Each firm wants to achieve the highest profits. The following matrix shows strategies and payoffs for both firms that must decide how to price.
Firm B
High Low
Firm A High 1000, 1000 -200, 1200
Low 1200, -200 600,600

a. Does either firm have a dominant strategy, and if so, what is it?
b. What is the Nash equilibrium of this game?
c. Why would this be called a prisoner's dilemma game?

Solution Preview

a. Yes, each of the firm has a dominant strategy of pricing Low. This is because the payoffs of pricing low are 1,200 and 600 which are higher than the ...

Solution Summary

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