Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Firm B will always match Firm A's prices regardless of its own payoff.
B
Firm B will choose a higher price to maximize its profit.
C
Firm B's optimal strategy is independent of Firm A's decision.
D
Firm B will only lower prices if it is guaranteed to gain market share.
Understanding the Answer
Let's break down why this is correct
Answer
In an oligopoly, where a few firms control the market, if Firm A decides to lower its prices as a dominant strategy, it means this is the best choice for Firm A regardless of what Firm B does. Firm B will likely respond to this price reduction because it wants to remain competitive and not lose customers. If Firm A lowers its prices, Firm B may also feel pressured to lower its prices or risk losing sales. This creates a situation where both firms might end up lowering prices, leading to lower profits for both. For example, if Firm A sells a popular product for $10 and cuts the price to $8, Firm B might lower its price to $8 as well to keep its customers, showing how Firm B's strategy is influenced by Firm A's dominant choice.
Detailed Explanation
Firm B will likely lower its prices too. Other options are incorrect because This option suggests Firm B will ignore Firm A's actions; This choice implies Firm B can act alone.
Key Concepts
Dominant Strategies
Oligopoly Market Structure
Payoff Matrix
Topic
Dominant Strategies in Game Theory
Difficulty
hard level question
Cognitive Level
understand
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