Final answer:
An empty threat from Chipco regarding price reduction is likely ineffective if Dramco sees the threat as non-credible. Game theory suggests that both Chipco and Dramco would avoid a price war, maintaining higher prices for higher profits, in a form of silent cooperation akin to cartel behavior.
Step-by-step explanation:
When Chipco makes an empty threat about lowering their price if Dramco does not align with Chipco's national pricing strategies, it can influence the outcome of the payoff matrix in the context of game theory. In a typical payoff matrix setup used to analyze strategic interactions between oligopolistic firms, threats are elements that can deter or encourage certain actions. However, if the threat is not credible or is known to be empty, then it might not affect Dramco's strategy.
In this case, based on the information provided, oligopolists in the industry tend to match price cuts but do not match price increases. This forms a silent cooperation, making the cartel act like a monopolist to some degree by not incentivizing price changes. Hence, if Chipco's threat to lower the price is deemed empty by Dramco, then Dramco might choose to ignore the threat and continue with its own pricing strategy, maintaining the silent cooperation and enjoying monopoly-like profits without legal agreements.
If both firms understand the benefits of maintaining high prices and the damaging effects of price wars, it is likely that neither firm will want to deviate from the equilibrium which ensures them a higher profit, despite the empty threats. This is an example of the prisoner's dilemma where two rational individuals might not cooperate, even if it appears that it is in their best interest to do so.