Question
Consider a pizza pricing game, in which one store (Donna's Deep Dish) is much larger than the other (Pierce's Pizza Pies), and the stores have
Consider a pizza pricing game, in which one store (Donna's Deep Dish) is much larger than the other (Pierce's Pizza Pies), and the stores have to decide whether to price High or Low. The payoff table for the game is:
Seem payoff table
The noncooperative dominant-strategy equilibrium is (High, Low), yielding profits of 132 to Donna's and 70 to Pierce's, for a total of 202. If the two could achieve (High, High), their total profit would be 156+60=216, but Pierce's would not agree to this pricing. Suppose the two stores can reach an enforceable agreement whereby both charge High and Donna's pays Pierce's sum of money. The alternative to this agreement is simply the noncooperative dominant-strategy equilibrium. They bargain over this agreement, and Donna's has 3 times as much bargaining power as Pierce's. In the resulting agreement, what sum will Donna's pay to Pierce's?
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