Westinghouse and General Electric are competing on the newest version of clothes washer and dryer combinations. Two pricing strategies exist: price high or price low. The profit from each of the four possible combinations of decisions is given in the following payoff matrix:

Westinghouse's price

High ($4000)

Low ($2000)

General Electric's

price

High ($4000)

W: $10,000,000

GE: $10,000,000

W: $16,000,000

GE: $-4,000,000

Low($2000)

W: $-4,000,000

GE: $16,000,000

W: $4,000,000

GE: $4,000,000

Payoffs in dollars of profit.

a) (2 pts.) Which strategy offers both Westinghouse and General Electric the best financial outcome?

b) (2 pts.)Does either firm have a dominant strategy? If yes, which firm and what strategy?

c) (4 pts.) The Nash equilibrium is for Westinghouse to set its price at __________ and earn a profit of __________ and for General Electric to set its price at ______________ and earn a profit of _____________.

d) (2 pts.) Why do we see that the strategy that results is not the strategy that offers both players the best financial outcome?

Managerial Economics and Organizational Architecture

Edition:7th

Author:James Brickley,Clifford Smith,Jerold Zimmerman