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

Through iterated dominance, we can eliminate the strategies of both companies choosing a high price. Then, we can eliminate Company A's strategy of choosing a low price since Company B would choose a high price, resulting in a higher payoff for Company B. Therefore, the only remaining equilibrium is for both companies to choose a medium price, resulting in a payoff of (4,4) for each company.

The Following Payoff Matrix Shows the Profits Accruing to Two