The following payoff matrix shows the profits accruing to two firms,Company A and Company B,under different pricing strategies.In each cell,the figure on the left indicates Company A's payoff and the figure on the right indicates Company B's payoff.
Table 15-2
-Refer to Table 15-2.Using iterated dominance,one can conclude that in equilibrium:
A)company A chooses a high price and company B chooses a medium price.
B)both company A and company B choose a high price.
C)both company A and company B choose a medium price.
D)company A chooses a medium price and company B chooses a high price.

Question

The following payoff matrix shows the profits accruing to two firms,Company A and Company B,under different pricing strategies.In each cell,the figure on the left indicates Company A's payoff and the figure on the right indicates Company B's payoff.
Table 15-2 
-Refer to Table 15-2.Using iterated dominance,one can conclude that in equilibrium:
A)company A chooses a high price and company B chooses a medium price. 
B)both company A and company B choose a high price. 
C)both company A and company B choose a medium price. 
D)company A chooses a medium price and company B chooses a high price.

Quizplus · Accepted Answer

By using the iterated dominance method, we can first eliminate the strategies where one firm has a lower payoff than the other. This results in the elimination of the (low, high) and (high, low) strategies. Next, we can eliminate the strategy where Company A chooses a high price because Company B would choose a low price to get a higher payoff (4 > 3). This leaves us with only one equilibrium strategy combination where both firms choose a medium price resulting in a (3, 3) payoff for both. Therefore, the answer is C.

The Following Payoff Matrix Shows the Profits Accruing to Two