Table 14-8

Two rival oligopolists in the coffee industry, Wide Awake and Zuma, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts.
-Refer to Table 14-8.If the firms act out of individual self-interest, which prices will they select?

Question

Table 14-8
  
Two rival oligopolists in the coffee industry, Wide Awake and Zuma, have to decide on their pricing strategy. Each can choose either a high price or a low price. Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts.
-Refer to Table 14-8.If the firms act out of individual self-interest, which prices will they select?

Quizplus · Accepted Answer

In a situation where firms act out of individual self-interest, they tend to choose strategies that maximize their own payoff, often leading to a Nash equilibrium. In this case, both firms selecting a low price is likely the Nash equilibrium, as it prevents either firm from being undercut by the other, which would happen if one chose a high price while the other chose a low price.

Table 14-8 Two Rival Oligopolists in the Coffee Industry, Wide Awake and Coffee