Explaining Equilibrium Preference in a Pricing Game
Two competing companies, 'AquaRide' and 'WaveJet', sell very similar personal watercraft. They are independently setting their prices for the upcoming season. The market has two potential stable outcomes where neither company has an incentive to unilaterally change its price: one where both companies set a high price, and another where both set a low price. In the (High Price, High Price) outcome, each company earns a profit of $10 million. In the (Low Price, Low Price) outcome, each company earns a profit of $3 million. Assuming the companies are rational and aim to maximize their own profit, explain which of the two stable outcomes both companies would find more desirable and why.
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Explaining Equilibrium Preference in a Pricing Game
Consider a pricing game between two firms where each can choose to set a high price or a low price for their competing products. The table below shows the profits for each firm based on their combined decisions (Firm A's profit, Firm B's profit). The game has two stable outcomes where neither firm has an incentive to change its price if the other firm's price remains the same: one where both set a high price, and another where both set a low price.
Firm B: High Price Firm B: Low Price Firm A: High Price ($100, $100) ($15, $110) Firm A: Low Price ($110, $15) ($40, $40) Statement: Because both (High Price, High Price) and (Low Price, Low Price) are stable outcomes, both firms would be equally satisfied with either result.
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WaveRider: High Price WaveRider: Low Price AquaRush: High Price ($80k, $80k) ($20k, $90k) AquaRush: Low Price ($90k, $20k) ($35k, $35k) Evaluating a Strategic Pricing Decision
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