Empty Threats Firm 2 High price Low price High price 100,80 80,100 Firm 1 Low price 20,0 10,20 Pricing of Computers and Word Processors
100, 80 80, 100 20, 0 10, 20 Firm 2 High price Low price Firm 1 High price Low price Empty Threats Pricing of Computers and Word Processors
Charging a low price is clearly a dominant strategy for Firm 2. Can Firm 1 induce Firm 2 to charge a high price by threatening to charge a low price if Firm 2 charges a low price?No,as the payoff matrix makes clear: Whatever Firm 2 does,Firm 1 will be much worse off if it charges a low price.As a result,its threat is not credible
Charging a low price is clearly a dominant strategy for Firm 2 . Can Firm 1 induce Firm 2 to charge a high price by threatening to charge a low price if Firm 2 charges a low price? No, as the payoff matrix makes clear: Whatever Firm 2 does, Firm 1 will be much worse off if it charges a low price. As a result, its threat is not credible
Production Choice Problem RACE CAR MOTORS Small cars Big cars Small engines 3,6 3,0 FAR OUT ENGINES Big engines 1,1 8,3
3, 6 3, 0 1, 1 8, 3 RACE CAR MOTORS Small cars Big cars FAR OUT ENGINES Small engines Big engines Production Choice Problem
Suppose that Far Out threatens to produce big engines no matter what Race Car does,and that no other engine producer can easily satisfy the needs of Race Car. But threat is not credible:Once Race Car responded by announcing its intentions to produce small cars,Far Out would have no incentive to carry out its threat
Suppose that Far Out threatens to produce big engines no matter what Race Car does, and that no other engine producer can easily satisfy the needs of Race Car. But threat is not credible: Once Race Car responded by announcing its intentions to produce small cars, Far Out would have no incentive to carry out its threat
Modified Production Choice Problem RACE CAR MOTORS Small cars Big cars Small engines 0,6 0,0 FAR OUT ENGINES Big engines 1,1 8,3
0, 6 0, 0 1, 1 8, 3 RACE CAR MOTORS Small cars Big cars FAR OUT ENGINES Small engines Big engines Modified Production Choice Problem