Suppose there are two firms, A and B, which compete with each other in the market for a unique product. Each firm can charge one of two prices for this product: a high price , or a low price If both firms charge the high price , they split total market profits of 1,000. If they both charge the low price total market profits fall to 400. If firm A charges the high price but firm B undercuts its rival by charging the low price total market profits fall to 750, but more people buy from firm B because it has a lower price, so it gains 80 per cent of total market profits. The outcome where firm A undercuts firm B is symmetric, with firm A gaining 80 per cent of market profits.

(a) Describe the four elements of this game.

(b) Set up a payoff table like those in Section 5.4, and use it to solve for the Nash equilibrium.

(c) Does either firm have a dominant strategy?

(d) Is this game similar to any of the examples in Section 5.4?