Scenario: Two rival firms charge equal prices for their products, which are perfect substitutes. Firm 1 is considering offering a 10 percent discount on the market price to increase sales. The game tree below shows the respective payoffs to each firm, depending on the decisions each makes.

-Refer to the scenario above.Which of the following is true?

Question

Scenario: Two rival firms charge equal prices for their products, which are perfect substitutes. Firm 1 is considering offering a 10 percent discount on the market price to increase sales. The game tree below shows the respective payoffs to each firm, depending on the decisions each makes.
 
-Refer to the scenario above.Which of the following is true?

Quizplus · Accepted Answer

If Firm 1 does not offer a discount, then Firm 2 should not offer a discount either, as they would both have the same payoff. However, if Firm 1 does offer a discount, then Firm 2 should follow suit in order to maintain their market share and avoid losing customers to Firm 1. Therefore, the best choice for Firm 2 is to offer a discount if Firm 1 offers a discount.

Scenario: Two Rival Firms Charge Equal Prices for Their Products