Question

Company Omicron and Company Pi are the only sellers of a good with no close substitutes. They are each considering whether to maintain or raise their prices. They project the following daily profit payoff scenarios:

Company Pi
Company Omicron Increase Price Maintain Price
Increase Price $80, $180 $70, $280
Maintain Price $60, $80 $50, $230


a. Does Company Omicron have a dominant strategy to maintain their price, increase their price, or no dominant strategy?
b. Does Company Pi have a dominant strategy to maintain their price, increase their price, or no dominant strategy?
c. Assuming no cooperation, what will the profit be for each firm?
d. The government offers a $30 subsidy to the firms if they do not increase their prices. Draw a new payoff matrix reflecting the subsidy.
e. Assuming no cooperation, what will the profit be for each firm after the subsidy?

Answer 1

Step-by-step explanation:

a. Company Omicron does not have a dominant strategy as its profit depends on the strategy chosen by Company Pi.

b. Company Pi does not have a dominant strategy as its profit depends on the strategy chosen by Company Omicron.

c. If neither company cooperates and both choose to increase their prices, Company Omicron would earn $70 in profit while Company Pi would earn $80. If Company Omicron increases its price while Company Pi maintains its price, Company Omicron would earn $180 in profit while Company Pi would earn $50. If Company Omicron maintains its price while Company Pi increases its price, Company Omicron would earn $80 in profit while Company Pi would earn $230. If both companies maintain their price, Company Omicron would earn $50 in profit while Company Pi would earn $230.

d.

Company Pi

Company Omicron Increase Price Maintain Price

Increase Price $110, $210 $100, $310

Maintain Price $90, $80 $80, $260

e. If neither company cooperates and both choose to increase their prices, Company Omicron would earn $100 in profit while Company Pi would earn $110. If Company Omicron increases its price while Company Pi maintains its price, Company Omicron would earn $210 in profit while Company Pi would earn $80. If Company Omicron maintains its price while Company Pi increases its price, Company Omicron would earn $80 in profit while Company Pi would earn $260. If both companies maintain their price, Company Omicron would earn $50 in profit while Company Pi would earn $230. With the subsidy, both companies would earn $80 in profit if they maintain their price.