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CA Foundation · Business Economics · Price Determination in Different Markets

Two firms in an oligopoly each have the option of charging a high price or a 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 ₹20 lakh. Which outcome results if each firm acts independently without collusion, choosing its best response?

Both firms charge the low price and each earns ₹30 lakh. Charging low gives each firm a higher payoff whatever the rival does (70 against 50, and 30 against 20), so low is a dominant strategy, even though collusion would give 50 each.

  1. ABoth charge high, each earning ₹50 lakh
  2. BBoth charge low, each earning ₹30 lakhCorrect
  3. COne charges high and the other low
  4. DFirms alternate between high and low prices

Explanation

If the rival charges high, charging low gives 70 against 50 for high. If the rival charges low, charging low gives 30 against 20 for high. Low is the dominant strategy for both, so both charge low and earn ₹30 lakh each, even though both would be better off at high prices.

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