Consider two firms that find themselves in a prisoners’ dilemma scenario in terms of setting prices. To avoid the dilemma the firms might be able toGroup of answer choicesdifferentiate the products they are sellingpromise to set higher pricesuse the fact that they will each be selling in the market in the future to punish low pricesrestrict the output (or capacity) they sell, so as to credibly set higher pricesa, c and d
Question
Consider two firms that find themselves in a prisoners’ dilemma scenario in terms of setting prices. To avoid the dilemma the firms might be able toGroup of answer choicesdifferentiate the products they are sellingpromise to set higher pricesuse the fact that they will each be selling in the market in the future to punish low pricesrestrict the output (or capacity) they sell, so as to credibly set higher pricesa, c and d
Solution
To avoid the prisoner's dilemma scenario in terms of setting prices, the firms might be able to:
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Differentiate the products they are selling: If the products are differentiated, they are not perfect substitutes for each other. This means that a firm can increase its price without losing all its customers to the other firm. This can help to avoid the prisoner's dilemma scenario where both firms have an incentive to lower their prices.
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Promise to set higher prices: This could potentially work, but it relies on trust between the firms. If one firm breaks the promise and lowers its price, it could trigger a price war.
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Use the fact that they will each be selling in the market in the future to punish low prices: This is known as a tit-for-tat strategy. If one firm lowers its price, the other firm responds by lowering its price in the next period. This can deter a firm from lowering its price in the first place.
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Restrict the output (or capacity) they sell, so as to credibly set higher prices: By limiting supply, the firms can create scarcity, which can help to maintain higher prices.
So, the correct answer is: a, c and d.
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Regardless of market structures, all firmsGroup of answer choicesconsider the actions of rivals.maximize profit by setting marginal revenue equal to marginal cost.produce a differentiated product.have the ability to set price. PreviousNext
Consider a pricing game between Coles and Woolworths. Each firm simultaneously chooses whether to price High or Low. If both firms price Low, the payoffs are 8 to each firm. If both firms choose High, each firm gets 12. If one firm chooses Low and the other High, the Low-priced firm gets 14 and the firm that opted for High gets 2. Which statement is true?Group of answer choicesthe outcome of the game is (High, High); this game is not a prisoners’ dilemmathe outcome of the game is (High, High); this game is a prisoners’ dilemmathe outcome of the game is (Low, Low); this game is not a prisoners’ dilemmathe outcome of the game is (Low, Low); this game is a prisoners’ dilemmanone of the above Flag question: Question 7
In economics, a game is always a prisoners’ dilemma.Group of answer choicesTrueFalse
A firm that finds itself in a prisoners’ dilemma would get a higher payoff if it changed it’s strategy (assuming the other firm did not).Group of answer choicesFalseTrue
Setting prices based on the costs of production is known as …………………….?Select one:a.Market skimming pricingb.Cost-based pricingc.Penetration pricingd.Competitive pricing
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