Firm A and Firm B are the only pizza shops in a remote town. The products of each firm are close substitutes to the other. Therefore, if one firm advertises a promotion, it attracts almost all the customers away from the other firm. If neither of them advertises a promotion, they both can keep high prices.

The following table shows the outcome that results from adopting alternative strategies.

a) What is the dominant strategy of Firm A?

b) What is the dominant strategy of Firm B?

c) What is the Nash equilibrium in this game and why?

d) Using the above as an example, explain why oligopolies are more likely to earn less than monopoly profits, even when they are allowed to cooperate and earn monopoly profits.

Firm A and Firm B are the only pizza shops in a remote town. The products of each firm are close substitutes to the other. Therefore, if one firm advertises a promotion, it attracts almost all the customers away from the other firm. If neither of them advertises a promotion, they both can keep high prices. The following table shows the outcome that results from adopting alternative strategies. FIRM A ADVERTISE NOT ADVERTISE $4,000 $500 ADVERTISE FIRM B $4,000 $10,000 $10,000 $8,000 NOT ADVERTISE $500 $8,000