-Consider the pricing game depicted in Figure 5.5 in which the payoffs are in millions of dollars. If this game is played three times, the Nash equilibrium strategy profile in the second stage is:
A) {Low price, Low price}.
B) {Low price, High price}.
C) {High price, Low price}.
D) {High price, High price}.

Question

-Consider the pricing game depicted in Figure 5.5 in which the payoffs are in millions of dollars. If this game is played three times, the Nash equilibrium strategy profile in the second stage is:
A) {Low price, Low price}. 
B) {Low price, High price}. 
C) {High price, Low price}. 
D) {High price, High price}.

Quizplus · Accepted Answer

In a repeated game scenario, players often follow a tit-for-tat strategy or similar, where they replicate the other player's previous move to encourage cooperation or retaliate for defection. In the context of pricing, setting a low price in the first stage can lead to a mutual low price strategy in the second stage as each firm seeks to avoid a price war, assuming rationality and profit maximization. This makes {Low price, Low price} a likely Nash equilibrium for the second stage, as it can represent a stable outcome where neither firm has an incentive to deviate unilaterally.

-Consider the Pricing Game Depicted in Figure 5