Question

Two oligopolists have to decide on their pricing strategy. Each can choose either a high or a low price. If they both choose a high​ price, each will make​ $12 million, but if they both choose a low​ price, each will make only​ $8 million. If one sets a high price and the other a low​ one, the​ low-priced firm will make​ $16 million, but the​ high-priced firm will make only​ $4 million.

In the absence of​ collusion, each will _________.

Answer 1

Considering absence of collusion,the firms will choose low price in this instance.

Step-by-step explanation:

• First,focusing on all the possible payoffs for the firms under low price situation, the possible individual payoffs for the firms are $8 million and $16 million considering that the other firm chooses low price and high price respectively.
• Now, regarding the individual payoffs from choosing high price, the possible payoffs for the firms are $12 million and $4 million, considering that the other firm chooses high price and low price respectively.
• Therefore, notice that considering all possible scenarios,both the minimum and maximum payoffs from choosing low price are actually higher than the same estimates under choosing higher price.
• Hence, to ensure a higher subsequent individual payoff, both the firms would expectedly choose lower price considering the possibilities of both higher minimum and maximum payoff compared to choosing higher price.