Attaburger and Beefsteak are the only two fast-food hamburger restaurants in a small town. Each firm can choose to set a high price or a low price for a hamburger meal. The payoff matrix below shows the daily profits for any combination of strategies the two restaurants can choose. The payoff for Attaburger is listed first; the payoff for Beefsteak is listed second. Assume both restaurants have complete information. Beef steak
High price Low price
Attaburger High price $10, $13 $ 6, $14
Low price $ 12, $8 $ 9, $ 7
a. If Attaburger selects a high price, what strategy will Beefsteak select? Explain using the dollar values in the payoff matrix.
b. Does Beefsteak have a dominant strategy? Explain using the dollar values in the payoff matrix.
c. Assume that Attaburger and Beefsteak collude, both agreeing to choose high prices in order to maximize their joint profit at $23. If such an agreement is not legally enforceable, does Attaburger have an incentive to break the agreement? Explain using specific values.
d. Instead of colluding, the firms simultaneously select their prices. In the Nash equilibrium, what are the daily profits for each of the following?
a. Attaburger
b. Beefsteak