Abbott and Costello are two firms that compete with each other in the market for ice-cream.They can price their product at a high,medium,or low price.The following matrix shows their profits from their respective pricing strategies.
Table 15-3
-Refer to Table 15-3.Using the method of iterated dominance it can be concluded that the outcome of the given payoff matrix is:
A)a dominant-strategy equilibrium.
B)indeterminate as there are no dominant strategies.
C)both players choosing a low pricing strategy.
D)both players choosing a high pricing strategy.

Question

Abbott and Costello are two firms that compete with each other in the market for ice-cream.They can price their product at a high,medium,or low price.The following matrix shows their profits from their respective pricing strategies.
Table 15-3 
-Refer to Table 15-3.Using the method of iterated dominance it can be concluded that the outcome of the given payoff matrix is:
A)a dominant-strategy equilibrium. 
B)indeterminate as there are no dominant strategies. 
C)both players choosing a low pricing strategy. 
D)both players choosing a high pricing strategy.

Quizplus · Accepted Answer

By using the method of iterated dominance, we can eliminate the dominated strategies. First, we can eliminate the (H,M) outcome as both players would prefer to choose (H,H). Then, we can eliminate the (M,H) outcome as both players would prefer to choose (L,L). Finally, we are left with (L,H) and (H,L) as the only possible outcomes. In each case, one player has a dominant strategy (Abbott chooses H and Costello chooses L in the first case, and vice versa in the second case). Therefore, the outcome is a dominant-strategy equilibrium, and the best choice for each player is to choose their dominant strategy.

Abbott and Costello Are Two Firms That Compete with Each