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	11,11	2,15
Low	15,2	8,8

For example, the lower-left cell shows that if Flashfry prices low and Warmbreeze prices high, Flashfry will earn a profit of $15 million, and Warmbreeze will earn a profit of $2 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 high _____ a dominant strategy for both Flashfry and Warmbreeze.

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

A. Both Flashfry and Warmbreeze will choose a low price.

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

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

D. Both Flashfry and Warmbreeze will choose a high price.

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

True

False