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Suppose two competitors, Coa Inc., and Han, Inc., are locked in a bitter pricing struggle in the alumuninum industry. In the limit pricing payoff matrix, Coa can choose a given row of outcomes by offering a limit price ("up") or monopoly price ("down"). Han can choose a given column of outcomes by choosing to offer a limit price ("left") or monopoly price ("right"). Neither firm can choose cell of the payoff matrix to obtain; the payoff for each firm depends upon the pricing strategies of both firms.

Han

Coa Pricing Strategy Limit Price Monopoly Price
Limit Price $1.5 billion, $3 billion $2.5 billion, $2 billion
Monopoly Price $1 billion, $4 billion $1.75 billion, $3 billion

A. Is there a dominant strategy equilibrium in this problem? If so, what is it? Explain why the strategy you chose is the dominant strategy.

B. Is there a Nash equilibrium in this problem? If so, what is it? Explain.

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Solution describes the steps to find dominant strategy equilibrium and Nash equilibrium for the given problem.

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Solution:

A. Is there a dominant strategy equilibrium in this problem? If so, what is it? Explain why the strategy you chose is the dominant strategy.

If Han chose limit price the best strategy for Coa is limit price as its payoff is higher at $1.5 billion compared to $1 billion for monopoly.

If Han chose Monopoly price than the best strategy fro Coa is Limit price as its payoff is higher at $2.5 billion ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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