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.In equilibrium,________.

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.In equilibrium,________.

Quizplus · Accepted Answer

In equilibrium, both firms will offer a discount because if one firm offers a discount and the other does not, the firm offering the discount will capture more market share, prompting the other firm to also offer a discount to remain competitive.

Scenario: Two Rival Firms Charge Equal Prices for Their Products