6. Using a payoff matrix to determine the equilibrium outcome

Suppose that Bean Bliss and Brew Buddy are the only two firms in a hypothetical market that produce and sell espresso machines. 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 machines.

	Brew Buddy Pricing
High	Low
Bean Bliss Pricing	High	14,14	6,18
Low	18,6	12,12

For example, the lower-left cell shows that if Bean Bliss prices low and Brew Buddy prices high, Bean Bliss will earn a profit of $18 million, and Brew Buddy will earn a profit of $6 million. Assume this is a simultaneous game and that Bean Bliss and Brew Buddy are both profit-maximizing firms.

If Bean Bliss prices high, Brew Buddy will make more profit if it chooses a price, and if Bean Bliss prices low, Brew Buddy will make more profit if it chooses a price.

If Brew Buddy prices high, Bean Bliss will make more profit if it chooses a price, and if Brew Buddy prices low, Bean Bliss will make more profit if it chooses a price.

Considering all of the information given, pricing low a dominant strategy for both Bean Bliss and Brew Buddy.

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

Bean Bliss will choose a high price, and Brew Buddy will choose a low price.

Both Bean Bliss and Brew Buddy will choose a high price.

Both Bean Bliss and Brew Buddy will choose a low price.

Bean Bliss will choose a low price, and Brew Buddy will choose a high price.

True or False: The game between Bean Bliss and Brew Buddy is an example of the prisoners' dilemma.

True

False