Question

Using a payoff matrix to determine the equilibrium outcome Suppose there are only two firms that sell Blu-ray players, Movietonia and Videotech. 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 players. For example, the lower-left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $15 million and Videotech will earn a profit of $3 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profit-maximizing firms. If the firms do not collude, what strategies will they end up choosing? True or False: The game between Movietonia and Videotech is an example of the prisoners' dilemma.

Answer 1

The game between Movietonia and Videotech is not an example of the prisoners' dilemma. Both firms will likely end up choosing to set a high price, resulting in them each earning $25 million in profits.

Step-by-step explanation:

The game between Movietonia and Videotech is not an example of the prisoners' dilemma.

In a prisoners' dilemma, both players have a dominant strategy to defect, even though they would both be better off if they both cooperated. In the given scenario, Movietonia and Videotech have a dominant strategy to set a high price for their Blu-ray players, as it is more profitable for both of them.

The likely outcome in this case is that both firms will end up choosing to set a high price, resulting in them each earning $25 million in profits.

Answer 2

According to the payoff matrix in the question:

If Movietonia chooses to price high then Videotech will prefer to price low as 15>11 and if Movietonia chooses to price low even then Videotech will prefer to price low as 8>2.

Thus Videotech has a dominant strategy- of pricing low.

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If Videotech prices high, then Movietonia prefers to price low as 15>:11 and if Videotech prices low even then .Movietonia prefers low pricing as 8>2.

Thus Movietonia has a dominant strategy of pricing low.

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In case both do no collude. both will have pricing low as a dominant strategy. Both will and up choosing a low price.

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The above situation is an example of prisoner's dilemma because if both of them cooperate and price high they end up earning higher payoffs than without cooperating.