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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

Two firms in an oligopoly can each charge a High or Low price. If both charge High, each earns ₹50 lakh. If both charge Low, each earns ₹30 lakh. If one charges Low and the other High, the Low-price firm earns ₹70 lakh and the High-price firm earns ₹10 lakh. If the firms act independently and each seeks its best response, what is the outcome?

Both firms charge Low and earn ₹30 lakh each. Low is a dominant strategy because it pays more whatever the rival does: ₹70 lakh against ₹50 lakh if the rival charges High, and ₹30 lakh against ₹10 lakh if the rival charges Low.

  1. ABoth charge High, each earning ₹50 lakh
  2. BBoth charge Low, each earning ₹30 lakhCorrect
  3. COne charges Low earning ₹70 lakh, the other High earning ₹10 lakh
  4. DBoth charge High, each earning ₹10 lakh

Explanation

If the rival charges High, Low gives ₹70 lakh against ₹50 lakh for High. If the rival charges Low, Low gives ₹30 lakh against ₹10 lakh for High. Low is the dominant strategy for both, so both charge Low and earn ₹30 lakh each, though both would be better off at High. Option A is the cooperative outcome, not the independent one.

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