With the payoff matrix presented below which shows the annual profits for alternative pricing decisions encountered by two firms in a duopoly (assuming that production costs are similar): Firm 2 Firm 1 Charge low price 1: $15M; 2: $15M Charge low price Charge high price 1: $30M; 2: $10M 1: $25M; 2: $25M Charge high price 1: $10M; 2: $30M ➤What is the best (dominant) pricing decision for Firm 1? Why? What is the best (dominant) pricing decision for Firm 2? Why? If both firms choose to cooperate and agree on pricing, which pricing decision will they both follow? How can each firm make sure that the other firm will follow their pricing agreement and
With the payoff matrix presented below which shows the annual profits for alternative pricing decisions encountered by two firms in a duopoly (assuming that production costs are similar): Firm 2 Firm 1 Charge low price 1: $15M; 2: $15M Charge low price Charge high price 1: $30M; 2: $10M 1: $25M; 2: $25M Charge high price 1: $10M; 2: $30M ➤What is the best (dominant) pricing decision for Firm 1? Why? What is the best (dominant) pricing decision for Firm 2? Why? If both firms choose to cooperate and agree on pricing, which pricing decision will they both follow? How can each firm make sure that the other firm will follow their pricing agreement and
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:With the payoff matrix presented below which shows the annual profits for alternative pricing decisions
encountered by two firms in a duopoly (assuming that production costs are similar):
Firm 2
Firm 1
Charge low price
1: $15M; 2: $15M
Charge low price
Charge high price
1: $30M; 2: $10M
1: $25M; 2: $25M
Charge high price
1: $10M; 2: $30M
What is the best (dominant) pricing decision for Firm 1? Why?
What is the best (dominant) pricing decision for Firm 2? Why?
If both firms choose to cooperate and agree on pricing, which pricing decision will they both
follow? How can each firm make sure that the other firm will follow their pricing agreement and
will not cheat?
If all the firms in an oligopolistic market have similar pricing decisions (where all charge high
prices or all charge low prices), is this enough evidence to say there is collusion? Explain.
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