Mitchell Electronics produces a home video game that has become very popular with children. Mitchell's managers have reason to believe that Wright Televideo Company is considering entering the market with a competing product. Mitchell must decide whether to set a high price to accommodate entry or a low price to deter entry. The payoff matrix below shows the profit outcome for each company under the alternative price and entry strategies with the payoffs occurring as (Mitchell, Wright).
Wright Televideo
Enter Do Not Enter
High Price 60, 25 85, 0
Mitchell
Electronics Low Price 30, -20 60, 0
a) Does Mitchell have a dominant strategy? Explain.
b) Does Wright have a dominant strategy? Explain.
c) Mitchell's managers have vaguely suggested a willingness to lower price in order to deter entry. Is this threat credible in light of the payoff matrix? Explain.
d) If the threat is not credible, what changes in the payoff matrix would be necessary to make the threat credible? What business strategies could Mitchell use to alter the payoff matrix so that the threat is credible?