2. Suppose the managers of Superstore and Sobeys must decide independently and simultaneously whether to print their respective "high price flyer", which we denote strategy H, or their "low price flyer" which we denote strategy L. If both choose strategy H, each firm would receive a profit of $3 million. If one firm chose H while the other chose L, the profit for the firm that chose H would be $1 million while the profit to the firm that chose L would be $4 million. If both firms choose strategy L, the profit to each firm would be $2 million. 

a) Depict this game as a two-row by two-column matrix, with Superstore being the firm that must choose the H or L row and Sobeys being the firm that must choose the H or L column. The payoff in each cell is an ordered pair of numbers, where the first number denotes the profit (in millions of dollars) to Superstore and second number denotes the profit (in millions of dollars) to Sobeys. 

b) What is the unique pair of strategies that would result? Explain why this pair of strategies are mutually best-response strategies and are, therefore, constitute a Nash equilibrium. 

c) Would the firms be maximizing their joint profit? If not, could the firms collude in order to increase their individual and joint profit? Explain why a collusive agreement would be very difficult to implement.

Answer rating: 100% (QA)

a The game matrix can be depicted as follows Superstore H Superstore L Sobeys H 3 3 1 4 Sobeys L 4 1 ... View the full answer