A Market Has Only Two Sellers

Essay

A market has only two sellers. They are both trying to decide on a pricing strategy. If both firms charge a high price, then each firm will experience a 5 percent increase in profits. If both firms charge a low price, then each firm will experience a 3 percent decrease in profits. If Firm 1 charges a high price and Firm 2 charges a low price, then Firm 1 will experience a 4 percent decrease in profits and Firm 2 will experience a 6 percent increase in profits. If Firm 2 charges a high price and Firm 1 charges a low price, then Firm 2 will experience a 5 percent decrease in profits and Firm 1 will experience a 7 percent increase in profits.
(i) Construct a payoff matrix for this game.
(ii) Determine whether each firm has a dominant strategy and, if it does, identify the strategy.
(iii) Determine the optimal strategy for each firm.
(iv) Determine the Nash equilibrium.
(v) Is this a prisoners' dilemma? How do you know?