Question: A small town has only one pizza place, The Pizza Factory. A small competitor, Perfect Pies, is thinking about entering the market. The profits of these two fi rms depends on whether Perfect Pies enters the market and whether The Pizza Factory-as a price leader- decides to set a high or a low price. Use the payoff matrix below to answer the questions that follow.

a. What is the dominant strategy of The Pizza Factory?

b. What is the dominant strategy of Perfect Pies?

c. What is the Nash equilibrium in this situation?

d. The combined profit for both firms is highest when The Pizza Factory sets a high price and Perfect Pies stays out. If Perfect Pies enters the market, how will this affect the profits of The Pizza Factory? Would The Pizza Factory be willing to pay Perfect Pies not to enter the market? Explain.