Two Firms Are Competing in a Duopoly and Are Trying

question 207

Essay

Two firms are competing in a duopoly and are trying to decide which price to set. The two prices under consideration are a high monopoly price and a low competitive level. If both seller A and seller B chose the monopoly price, each will earn $20 million of economic profit. However, if one picks the monopoly price while the other picks the competitive price, the high-price firm will lose $1 million while the low-price firm will earn $32 million. If both sell at the competitive level, they both earn a normal profit. Complete the payoff matrix below and determine the Nash equilibrium.

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Definitions:

Wide Range

Pertains to something covering a large number of different areas, subjects, or options.

Mild Side Effects

Minor or less severe undesired reactions or responses to a medication or treatment.

Conditioned Stimulus

An originally neutral stimulus that, after association with an unconditioned stimulus, comes to trigger a conditioned response in classical conditioning.

Pavlov's Experiment

A foundational study in behavioral psychology that demonstrated classical conditioning through the use of dogs, a bell, and food.