The Payoff Table Below Depicts Price Competition Between Two Electronics

question 27

Essay

The payoff table below depicts price competition between two electronics stores. (Payoffs are weekly profits in thousands of dollars for each store.)
$\begin{array}{c}\quad\quad\quad\quad\quad\quad\quad\text { Circuit City's Prices }\\\begin{array} { | c | c | c | c | } \hline \text { Best Buy's Prices } & \text { High } & \text { Medium } & \text { Low } \\\hline \text { High } & 100,100 & 75,120 & 70,90 \\\hline \text { Medium } & 120,65 & 80,80 & 65,110 \\\hline \text { Low } & 110,50 & 85,75 & 60,60 \\\hline\end{array}\end{array}$ (a) The stores determine their strategies independently of one another. What are the stores' respective equilibrium strategies? Explain briefly.
(b) Suppose that each store adopts a price matching strategy such that each pledges to instantly match any lower price by its rival. What will be the effect on the stores’ chosen prices? Will consumers benefit from such policies? Explain riefly.

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Definitions:

Government Intervention

Government intervention involves actions taken by a government to affect the economy, which can include regulations, subsidies, and taxes, aiming to correct market failures or achieve social goals.

Optimal Supply

Refers to the ideal level of stock or inventory that a company should maintain to meet demand without incurring excess costs or shortages.

Product Price

The monetary cost of a product, determined by factors such as production costs, competition, demand, and market conditions.

Externality

A consequence of an economic activity experienced by unrelated third parties; it can be positive or negative.