Problem: In a simple model of duopoly, two firms produce the same good, for which each firm charges either a low or a high price. Each firm wants to achieve the highest profits. The following matrix shows strategies and payoffs for both firms that must decide how to price.
Firm B
High Low
Firm A High 1000, 1000 -200, 1200
Low 1200, -200 600,600
Q1. Does either firm have a dominant strategy, and if so, what is it?
Q2. What is the Nash equilibrium of this game?
Q3. Why would this be called a prisoner's dilemma game?