2. Using a payoff matrix to determine the equilibrium outcome

Suppose that Flashfry and Warmbreeze are the only two firms in a hypothetical market that produce and sell air fryers. The following payoff matrix gives profit scenarios for each company (in millions of dollars), depending on whether it chooses to set a high or low price for fryers.

	Warmbreeze Pricing
High	Low
Flashfry Pricing	High	9,9	3,13
Low	13,3	6,6

For example, the lower-left cell shows that if Flashfry prices low and Warmbreeze prices high, Flashfry will earn a profit of $13 million, and Warmbreeze will earn a profit of $3 million. Assume this is a simultaneous game and that Flashfry and Warmbreeze are both profit-maximizing firms.

If Flashfry prices high, Warmbreeze will make more profit if it chooses a price, and if Flashfry prices low, Warmbreeze will make more profit if it chooses a price.

If Warmbreeze prices high, Flashfry will make more profit if it chooses a price, and if Warmbreeze prices low, Flashfry will make more profit if it chooses a price.

Considering all of the information given, pricing low a dominant strategy for both Flashfry and Warmbreeze.

If the firms do not collude, what strategies will they end up choosing?

Both Flashfry and Warmbreeze will choose a high price.

Flashfry will choose a low price, and Warmbreeze will choose a high price.

Both Flashfry and Warmbreeze will choose a low price.

Flashfry will choose a high price, and Warmbreeze will choose a low price.

True or False: The game between Flashfry and Warmbreeze is an example of the prisoners' dilemma.

True

False