Consider a small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sundays or whether it will close on that day. If both stores decide to close, then each has monthly profits of $21,000. However, if one is open and the other is closed, the open one has profits of $25,000 and the closed one has profits of $17,000. If both remain open on Sundays, then each has profits of $20,000.

a. Why might profits be lower if both are open on Sundays than if both are closed on Sundays?

b. Place payouts in the appropriate cells of the payoff matrix shown below.

c. Does either firm have a dominant strategy? Is there a dominant strategy equilibrium? Is this strategy joint profit maximizing?

d. Is the equilibrium discussed in part c likely to be stable over time? In particular, what might firms do to alter this outcome?

e. Is this an example of a prisoners' dilemma?