10.1k views
5 votes
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.

Videotech Pricing
High Low
Movietonia Pricing High 9, 9 2, 15
Low 15, 2 8, 8

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 $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profit-maximizing firms.

If Movietonia prices high, Videotech will make more profit if it chooses a ________ price, and if Movietonia prices low, Videotech will make more profit if it chooses a _____ price.
If Videotech prices high, Movietonia will make more profit if it chooses a _____ price, and if Videotech prices low, Movietonia will make more profit if it chooses a _____ price.

User Wizche
by
8.0k points

1 Answer

0 votes

Answer: Please refer to Explanation

Step-by-step explanation:

These firms are profit maximising and so will look for the higher payoff.

a) If Movietonia prices high, Videotech will make more profit if it chooses a ___LOW_____ price, and if Movietonia prices low, Videotech will make more profit if it chooses a ___LOW__ price.

• Looking at the matrix, if Movietonia charges high, Videotech can take advantage and charge Low. In doing so they would be making a profit of $15 million while Movietonia would make only $2million in profit.

• If Movietonia charges Low then Videotech would be better off charging Low as well because charging high would make them earn $2 million profit whereas charging Low will make them earn an $8 million profit.

b) If Videotech prices high, Movietonia will make more profit if it chooses a __LOW___ price, and if Videotech prices low, Movietonia will make more profit if it chooses a __LOW___ price.

• If Videotech were to charge a high price, it would be more beneficial to Movietonia to charge a low price. That way they can make $15 million in profit.

•If Videotech then decide to charge a low price, Movietonia will do best if they charge a Low Price as well. This way they make $8 million in profit and it's really all they can do as charging high would mean they only make $2 million in profit.

If you need any clarification do comment. Cheers.

User Vitae Aliquam
by
7.9k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.