Consider the following decision tree.This tree illustrates hypothetical payoffs to General Mills (GM)and Quaker Oats (Q)if they engage in a price war.If GM cuts prices and Quaker Oats follows this behavior:
A) GM loses $10 million.
B) Quaker Oats loses $10 million.
C) GM loses $2 million.
D) Quaker Oats loses $2 million.
E) both firms gain $3 million.

Question

Consider the following decision tree.This tree illustrates hypothetical payoffs to General Mills (GM)and Quaker Oats (Q)if they engage in a price war.If GM cuts prices and Quaker Oats follows this behavior: 
A) GM loses $10 million. 
B) Quaker Oats loses $10 million. 
C) GM loses $2 million. 
D) Quaker Oats loses $2 million. 
E) both firms gain $3 million.

Quizplus · Accepted Answer

The best choice for GM is to cut prices, as this will result in a lower loss of $2 million compared to the potential loss of $10 million if they do not cut prices and Quaker Oats does. For Quaker Oats, the best choice is to not cut prices, as this will result in a loss of $5 million, which is better than the potential loss of $10 million if they follow GM's price cut. Therefore, the best choice(s) for the firms are as follows:

GM: Cut prices
Quaker Oats: Do not cut prices.

Consider the Following Decision Tree