Question

Using the payoff​ matrix, and assuming no collusion between X and​ Y, what is the likely pricing​ outcome? A. Both firms will set the price at​ $35. B. Both firms will set the price at​ $40. C. Firm X will charge​ $35 and firm Y will charge​ $40. D. Firm X will charge​ $40 and firm Y will charge​ $35. Price collusion is mutually profitable because each firm achieves A. higher profits. B. increased sales. C. lower costs. D. higher productivity.

Answer 1

A- Both firms will set the price at $35

Step-by-step explanation:

When there is no collusion,

When Y charges $40, X's best strategy is to charge $35 since payoff is higher ($59 > $57).

When Y charges $35, X's best strategy is to charge $35 since payoff is higher ($55 > $50).

When X charges $40, Y's best strategy is to charge $35 since payoff is higher ($69 > $60).

When X charges $35, Y's best strategy is to charge $35 since payoff is higher ($58 > $59).

Therefore Nash equilibrium is: ($35, $35).