(Table) In the payoff matrix, two possible pricing strategies for one 12-pack of Coke and one of Pepsi are shown. The profit payoffs to each firm are also shown, where the top value in each outcome is the profit for Coke. What is the Nash equilibrium?
$\begin{array}{c}
\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Pepsi's Pricing Strategy per 12-pack} \
\begin{array}{cc}
&&\mathbf{\$ 4} & \mathbf{\$ 5} \
\text { Coke's Pricing Strategy per 12-pack} &\$ 4&\$ 2 \text { milion } & \$ 4 \text { million } \
&&\text { \$2 million } & \$ 1 \text { million } \
&\$ 5&\$ 1 \text { million } & \$ 3 \text { million } \
&&\$ 4 \text { million } & \$ 3 \text { million }
\end{array}\end{array}$
A) Both firms charge $5 per 12-pack.
B) Pepsi charges $4 and Coke charges $5 per 12-pack.
C) Both firms charge $4 per 12-pack.
D) Pepsi charges $5 and Coke charges $4 per 12-pack.

Question

Quizplus · Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the other player's strategy. Here, if Pepsi charges $4, Coke's best response is to also charge $4 to earn $2 million instead of $1 million. If Coke charges $4, Pepsi's best response is also to charge $4 to earn $2 million instead of $1 million. Thus, both charging $4 is the Nash equilibrium.

(Table) in the Payoff Matrix, Two Possible Pricing Strategies for One