A Pair of Duopolists, Firm a and Firm B, Manufacture

Essay

A pair of duopolists, Firm A and Firm B, manufacture seasonal toys. Both are planning their pricing strategies for the coming holiday season. The firms will choose between a low price (Low) and a high price (High). Firm A has a more flexible production and distribution system than Firm B and is therefore able to begin the season with one pricing strategy and then adopt a different strategy in mid-season. While Firm B is unable to change its strategy in mid-season, it can delay making a choice until after Firm A has announced its prices for the first part of the season. The firms' alternatives and payoffs are displayed in the decision tree diagram. Use this information to determine each firm's optimal strategy and anticipated payoff.