-Consider the pricing game depicted in Figure 13.7. Payoffs are in millions of dollars. Suppose that firm A believes that regardless of its strategy, there is a 25 percent chance that firm B will charge a high price and an 75 percent chance that firm B will charge a low price. If firm A is risk neutral, what is the subgame perfect equilibrium for this game?
A) {High price 6 High price}
B) {High price 6 Low price}
C) {Low price 6 High price}
D) {Low price 6 Low price}

Question

-Consider the pricing game depicted in Figure 13.7. Payoffs are in millions of dollars. Suppose that firm A believes that regardless of its strategy, there is a 25 percent chance that firm B will charge a high price and an 75 percent chance that firm B will charge a low price. If firm A is risk neutral, what is the subgame perfect equilibrium for this game?
A) {High price 6 High price} 
B) {High price 6 Low price} 
C) {Low price 6 High price} 
D) {Low price 6 Low price}

Quizplus · Accepted Answer

In a subgame perfect equilibrium, each firm chooses the strategy that maximizes its expected payoff given the strategies of the other firm. Given firm A's belief about firm B's pricing strategy, firm A will choose the strategy that maximizes its expected payoff. If firm A is risk neutral, it will calculate the expected payoff for each of its strategies and choose the one with the highest expected payoff. Given the probabilities, firm A will choose to charge a low price, leading to the equilibrium {Low price 6 Low price}.

-Consider the Pricing Game Depicted in Figure 13