(Table: GoGo Gas and Fanny's Fantastic Fuel) Use Table: GoGo Gas and Fanny's Fantastic Fuel. The table shows a payoff matrix for GoGo Gas and Fanny's Fantastic Fuel in a small town. Each firm can set either a high price or a low price, and customers view both gas stations as nearly perfect substitutes. If each firm sets the price independently, the Nash equilibrium outcome will be:

Question

(Table: GoGo Gas and Fanny's Fantastic Fuel) Use Table: GoGo Gas and Fanny's Fantastic Fuel. The table shows a payoff matrix for GoGo Gas and Fanny's Fantastic Fuel in a small town. Each firm can set either a high price or a low price, and customers view both gas stations as nearly perfect substitutes. If each firm sets the price independently, the Nash equilibrium outcome will be:
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Quizplus · Accepted Answer

The Nash equilibrium occurs when neither firm has an incentive to change their strategy given the other firm's strategy. In this case, if GoGo Gas sets a high price, Fanny's Fantastic Fuel will set a low price in order to attract customers. If GoGo Gas sets a low price, Fanny's Fantastic Fuel will still set a low price because a high price would result in no customers. Therefore, the only Nash equilibrium outcome is for both firms to set a low price, resulting in a payoff of $50 for each firm.