Background: This case provides the necessary price and quantity information to develop and motivate a standard Prisoners' Dilemma pricing game. The setting is the video game industry in 2009.The case begins with a brief history of competition between two giant video games vendors/firms engaging in price competition to maximizes their profits. In particular, the case focuses on price competition and sets up an actual pricing decision made by Sony and Microsoft as they approached the 2009 holiday season. Assume that both firms have to make a strategic decision of charging $399, or $299 as alternative strategies. Game theory is a strategic behavior in which each player/firm chooses its strategy to maximize its profit. The simplest case of game theory is the Prisoners' Dilemma case.

2.Given the price information given in Exhibits 1 and cost information for both companies in Exhibits 2 & 3, find the average variable cost of making a video game produced by Sony and Microsoft.

Q#2 . You are asked to calculate the AVC for bothSonyandMicrosoftwhen they both charge $399, Sony charges $399 and Microsoft reduces to $299, when Microsoft charges $399 and Sony reduces its price to $299, or when both Microsoft and Sony reduce price to $299 based on Exhibits 2 &3. Why do we do this? To determine the per contribution margin (per unit profit) =Price-AVC )and total contribution margin(Total profit) = (Price-AVC)Q. These values will be used to fill out the pay-off matrix when both use the same strategy (in cells 1 and 4) or an alternative strategy (cell 12, or cell 21).