The Low-Loyalty Windsurfing/Kitesurfing Game as a Prisoners' Dilemma
In the scenario with a low number of loyal customers, the windsurfing/kitesurfing pricing game transforms into a prisoners' dilemma. In this version, setting a low price (L) becomes the dominant strategy for both firms. As a result, the only Nash equilibrium is for both to price low. This outcome benefits the customers, even though the firms would collectively earn higher profits if they could both commit to setting high prices (H).
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Ch.7 The firm and its customers - The Economy 2.0 Microeconomics @ CORE Econ
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The Low-Loyalty Windsurfing/Kitesurfing Game as a Prisoners' Dilemma
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Activity: Evaluating Statements on the Windsurfing/Kitesurfing Game (Figure 7.25)
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Learn After
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You are the manager of 'WindRiders', one of two competing kitesurfing rental shops on a beach. Your only competitor is 'SurfNSea'. Most customers are tourists with no brand preference; they will always rent from the shop offering the lower price for the day. If prices are identical, you split the customers evenly. You must decide whether to set a 'High' or 'Low' price. Arrange the following steps to reflect the logical reasoning process that leads you to your final pricing decision in this one-time interaction.
Two competing surf shops, 'Beachside Boards' and 'Coastal Waves', are the only rental options on a popular beach. Customers are tourists who are highly price-sensitive and show no brand loyalty, always choosing the cheaper rental. The owner of Beachside Boards calls the owner of Coastal Waves and says, 'This price war is hurting us both. Let's make a gentlemen's agreement to both set high prices tomorrow. We'll both make more money.' Assuming this agreement is informal and not legally binding, which of the following represents the most astute evaluation of this proposal from the perspective of Coastal Waves for that single day?
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