Economics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 20

A town's two gas stations are each considering lowering prices to attract more sales. How this affects the profits for each gas station depends on whether the other station also lowers prices. The decision matrix in Figure 9Q-3 shows the payoffs, depending on what each player decides to do. Suppose both gas stations lower their prices, and they find themselves in the worst-case scenario in which both have also lowered their profits. Now suppose gas station A announces in an advertisement that it is committed to keeping the new low prices. Why would gas station A do this? What outcome would you expect?