Managerial Economics 2nd Edition by William Boyes

Exercise 7

Two pizza shops have just opened on campus: Giuseppe's Pizza, and Capri's Pizza. The "pricing game" these competitors face can be described in simple terms as follows. Each of them has to choose a price (high, medium, or low) for its "double cheese pizza," and the profitability of each choice depends on the price that the rival chooses. The situation is depicted in the accompanying table, where Giuseppe's Pizza is the row player and Capri's Pizza the column player. Profits are expressed in hundreds of dollars.

a. What is the Nash equilibrium (or equilibria) of the game? Is (high, high) a Nash equilibrium? Explain.
b. If these players play this game twice, what would be your prediction? What if they play it over and over again? Explain.