The stable outcome of the game in the figure shown will be:
A) Nike charges a high price, and Adidas charges a low price.
B) Nike charges a low price, and Adidas charges a high price.
C) Nike and Adidas both charge a low price.
D) Nike and Adidas both charge a high price.

Question

The stable outcome of the game in the figure shown will be:
A) Nike charges a high price, and Adidas charges a low price. 
B) Nike charges a low price, and Adidas charges a high price. 
C) Nike and Adidas both charge a low price. 
D) Nike and Adidas both charge a high price.

Quizplus · Accepted Answer

This is a classic Prisoner's Dilemma game in which both players have a dominant strategy of setting a low price, resulting in a Nash equilibrium where both firms charge a low price. If either firm deviates from this strategy and charges a high price, they will lose market share to the other firm and earn lower profits. Therefore, the stable outcome of the game is for both Nike and Adidas to charge a low price.

The Stable Outcome of the Game in the Figure Shown