Exhibit 10-7 Two-Firm Payoff Matrix
-Suppose costs are identical for the two firms in Exhibit 10-7. If both firms assume the other will compete and charge a lower price, equilibrium will be established by:

Question

Exhibit 10-7 Two-Firm Payoff Matrix 
-Suppose costs are identical for the two firms in Exhibit 10-7. If both firms assume the other will compete and charge a lower price, equilibrium will be established by:

Quizplus · Accepted Answer

In a situation where both firms assume the other will compete and charge a lower price, the best strategy for both firms is to charge a low price. This is because if one firm charges a high price, it risks losing a significant portion of the market to its competitor who charges a low price. But if both firms charge a low price, they will share the market equally and earn a profit of $4 million each. Therefore, the equilibrium will be established when Camel charges the low price and Marlboro also charges the low price.