Suppose there are only two firms that sell smartphones: Flashfone and Pictech. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its phones. Pictech Pricing Pictech Pricing
High Low
Flashfone Pricing High 11,11 3,15
Flashfone Pricing Low 15,3 9,9
For example, the lower-left cell shows that if Flashfone prices low and Pictech prices high, Flashfone will earn a profit of $15 million, and Pictech will earn a profit of $3 million. Assume this is a simultaneous game and that Flashfone and Pictech are both profit-maximizing firms.
If Flashfone prices high, Pictech will make more profit if it chooses a price, and if Flashfone prices low, Pictech will make more profit if it chooses a price.
If Pictech prices high, Flashfone will make more profit if it chooses a price, and if Pictech prices low, Flashfone will make more profit if it chooses a price.
Considering all of the information given, pricing low a dominant strategy for both Flashfone and Pictech.
If the firms do not collude, what strategies will they end up choosing?
(i) Flashfone will choose a low price, and Pictech will choose a high price.
(ii) Both Flashfone and Pictech will choose a high price.
(iii) Flashfone will choose a high price, and Pictech will choose a low price.
(iv) Both Flashfone and Pictech will choose a low price.
The game between Flashfone and Pictech is an example of the prisoners' dilemma
(i) True
(ii) False