1. The following matrix shows strategies and playoffs for two firms that must decide how to price. Firm 2 Price High Price Low Firm 1 Price High 400, 400 -50 ,700 Price Low 700, -50 100 , 100 Does...

Q1. The following matrix shows strategies and playoffs for two firms that must decide how to price.
     
     
    Firm 2
     
     
    
    
    Price High
    Price Low
    
    
    Firm 1
    Price High
    400, 400
    -50
    ,700
    
     
    Price Low
    700, -50
    100
    , 100
     
a. Does either firm have a dominant strategy, and if so, what is it?
If 1 plays HIGH then 2 will play Low ( 700 >400)
If 1 plays LOW then 2 will play Low ( 100 >-50)
Since firm 2always plays LOW, this is a dominant strategy for firm 2
If 2 plays HIGH then 1 will play Low ( 700 >400)
If 2 plays LOW then 1 will play Low ( 100 >-50)
Since firm 1 always plays LOW, this is a dominant strategy for firm 1
. What is the Nash equili
ium of this game?
The Nash will be (LOW, LOW) where both firms get 100 each
c. Why would this be called a prisoner’s dilemma game?
Yes this is like prisoners dilemma. This is so because with cooperation both players will like to get 400 each. However they end up with 100 instead as they are uncertain about the rivals’ move. The Nash is the least efficient outcome, since collusion is not allowed.
Q2. The following describes the ice cream industry in summer 2003:
Given the Federal Trade Commission’s approval of Nestle’s acquisition of Dreyer’s Grand Ice Cream Inc., two multinationals, Nestle SA and Unilever, are preparing to engage in ice cream wars. Unilever, which controls the Good Humor, Ben & Je
y’s, and Breyer’s
ands, holds 17 percent of the US market, while Nestle, owner of Haagen – Dazs and Drumstick
ands will control a similar share after buying Dreyer’s.
Ice cream has long been produced by small local dairies, given the problems with distribution. Most Americans eat ice cream in restaurants and stores, although 80% of the consumption of the big national
ands happens at home. Both Unilever and Nestle want to move into the away – from – home market by focusing on convenience stores, gas stations, video shops, and vending machines, a strategy the rivals have already undertaken in Europe.
Five national
ands – Haagen-Dazs, Nestle, Ben & Je
y’s, Breyer’s, and Dreyer’s – are developing new products and flavors, focusing on single-serving products that ca
y profit margins 15 to 25 percent higher than the tubes of ice cream in the super markets. The higher profit margin can open new distribution outlets. Although traditional freezer space is very costly, Unilever, Nestle and Dreyer’s have been pushing for logo – covered freezer cabinets in store, given the higher profit margins.
Under the FTC settlement, Nestle will be allowed to keep Dreyer’s distribution network, which delivers ice cream directly to more than85 percent of US grocers. Unilever must use middleman to deliver most of its Good Humor and Breyer’s products. Nestle can expand from Dreyer’s supermarket base to cinemas and gas...