Question

Suppose there are only two firms that sell Blu-ray players: Movietonia and Videotech. The following payoff matrix shows the profit (in millions of dollars) each company will earn, depending on whether it sets a high or low price for its players.
Videotech Pricing
High Low
Movietonia Pricing High 9, 9 2, 15
Low 15, 2 8, 8

For example, the lower-left cell shows that if Movietonia prices low and Videotech prices high, Movietonia will earn a profit of $15 million and Videotech will earn a profit of $2 million. Assume this is a simultaneous game and that Movietonia and Videotech are both profit-maximizing firms.

If Movietonia prices high, Videotech will make more profit if it chooses a ________ price, and if Movietonia prices low, Videotech will make more profit if it chooses a _____ price.
If Videotech prices high, Movietonia will make more profit if it chooses a _____ price, and if Videotech prices low, Movietonia will make more profit if it chooses a _____ price.

Answer 1

Answer: Please refer to Explanation

Explanation:

These firms are profit maximising and so will look for the higher payoff.

a) If Movietonia prices high, Videotech will make more profit if it chooses a ___LOW_____ price, and if Movietonia prices low, Videotech will make more profit if it chooses a ___LOW__ price.

• Looking at the matrix, if Movietonia charges high, Videotech can take advantage and charge Low. In doing so they would be making a profit of $15 million while Movietonia would make only $2million in profit.

• If Movietonia charges Low then Videotech would be better off charging Low as well because charging high would make them earn $2 million profit whereas charging Low will make them earn an $8 million profit.

b) If Videotech prices high, Movietonia will make more profit if it chooses a __LOW___ price, and if Videotech prices low, Movietonia will make more profit if it chooses a __LOW___ price.

• If Videotech were to charge a high price, it would be more beneficial to Movietonia to charge a low price. That way they can make $15 million in profit.

•If Videotech then decide to charge a low price, Movietonia will do best if they charge a Low Price as well. This way they make $8 million in profit and it's really all they can do as charging high would mean they only make $2 million in profit.

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