a. Does either firm have a dominant strategy? Does this game have a unique, pure-strategy Nash equilibrium? Identify all pure and mixed-strategy Nash equilibria.

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### Two Firms' Profit Matrix and Nash Equilibrium Analysis

#### 2. Profit Matrix Analysis of Two Competing Firms:

Below is the profit matrix for two competing firms facing strategic decisions regarding pricing:

|                |                  | **Firm 1**            |                        |                        |
|----------------|------------------|-----------------------|------------------------|------------------------|
|                |                  | **Low Price**         | **High Price**         |
| **Firm 2**     | **Low Price**    | 0, 2                  | 2, 1                   |
|                | **High Price**   | 7, 0                  | 6, 6                   |


**a. Dominant Strategy and Nash Equilibrium:**
- **Dominant Strategy:** 
    - A dominant strategy is one that results in the highest payoff for a player regardless of the other player's decision.
    - **Firm 1:**
        - If Firm 2 chooses a low price, Firm 1 would get 0 with low price and 2 with high price. Hence, Firm 1 prefers high price.
        - If Firm 2 chooses a high price, Firm 1 would get 7 with low price and 6 with high price. Hence, Firm 1 prefers low price.
    - **Firm 2:**
        - If Firm 1 chooses a low price, Firm 2 would get 2 with low price and 1 with high price. Hence, Firm 2 prefers low price.
        - If Firm 1 chooses a high price, Firm 2 would get 0 with low price and 6 with high price. Hence, Firm 2 prefers high price.
    - Neither firm has a dominant strategy.
    
- **Nash Equilibrium:**
    - **Pure-Strategy Nash Equilibrium:** 
        - The game has two pure-strategy Nash equilibria where both firms are choosing best responses:
            - Firm 1 chooses high price; Firm 2 chooses low price (Payoffs: 2 for Firm 1 and 1 for Firm 2).
            - Firm 1 chooses low price; Firm 2 chooses high price (Payoffs: 7 for Firm 1 and 0 for Firm 2).
    - **Mixed-Strategy Nash Equilibrium:**
        - Both firms randomize over their strategies such that each firm is indifferent to the strategies chosen by the other.

**b. Analysis with
Transcribed Image Text:### Two Firms' Profit Matrix and Nash Equilibrium Analysis #### 2. Profit Matrix Analysis of Two Competing Firms: Below is the profit matrix for two competing firms facing strategic decisions regarding pricing: | | | **Firm 1** | | | |----------------|------------------|-----------------------|------------------------|------------------------| | | | **Low Price** | **High Price** | | **Firm 2** | **Low Price** | 0, 2 | 2, 1 | | | **High Price** | 7, 0 | 6, 6 | **a. Dominant Strategy and Nash Equilibrium:** - **Dominant Strategy:** - A dominant strategy is one that results in the highest payoff for a player regardless of the other player's decision. - **Firm 1:** - If Firm 2 chooses a low price, Firm 1 would get 0 with low price and 2 with high price. Hence, Firm 1 prefers high price. - If Firm 2 chooses a high price, Firm 1 would get 7 with low price and 6 with high price. Hence, Firm 1 prefers low price. - **Firm 2:** - If Firm 1 chooses a low price, Firm 2 would get 2 with low price and 1 with high price. Hence, Firm 2 prefers low price. - If Firm 1 chooses a high price, Firm 2 would get 0 with low price and 6 with high price. Hence, Firm 2 prefers high price. - Neither firm has a dominant strategy. - **Nash Equilibrium:** - **Pure-Strategy Nash Equilibrium:** - The game has two pure-strategy Nash equilibria where both firms are choosing best responses: - Firm 1 chooses high price; Firm 2 chooses low price (Payoffs: 2 for Firm 1 and 1 for Firm 2). - Firm 1 chooses low price; Firm 2 chooses high price (Payoffs: 7 for Firm 1 and 0 for Firm 2). - **Mixed-Strategy Nash Equilibrium:** - Both firms randomize over their strategies such that each firm is indifferent to the strategies chosen by the other. **b. Analysis with
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