Table 11-9
Alpha and Beta are the only firms selling gyros in the upscale town of Delphi. Each firm must decide on whether to offer a discount to students to compete for customers. If one firm offers a discount but the other does not, then the firm that offers the discount will increase its profit. Table 11-9 shows the payoff matrix for this game.
-Refer to Table 11-9.If Alpha assumes that Beta would offer a student discount,what should it do?

Question

Table 11-9
  Alpha and Beta are the only firms selling gyros in the upscale town of Delphi. Each firm must decide on whether to offer a discount to students to compete for customers. If one firm offers a discount but the other does not, then the firm that offers the discount will increase its profit. Table 11-9 shows the payoff matrix for this game.
-Refer to Table 11-9.If Alpha assumes that Beta would offer a student discount,what should it do?

Quizplus · Accepted Answer

If Alpha assumes that Beta would offer a student discount, then the best choice for Alpha would be to also offer a student discount. This would keep Alpha's profit at $10,000 instead of risking it dropping to $5,000 if Beta offers a discount and Alpha does not. Offering a discount would also lead to a Nash equilibrium where both firms offer discounts and split the market evenly, resulting in profits of $8,000 for each firm.

Table 11-9 Alpha and Beta Are the Only Firms Selling