This question examines the oligopoly market for lattes on the University of Florida campus. You will use a normal form game to examine the incentives for different pricing strategies of two firms. You will identify whether either or both firms have a dominant pricing strategy, examine whether the game exhibits a Nash equilibrium, and discuss whether the game presents an opportunity to collude.
Lattes are produced by two different firms on the UF campus, Books and Beans (BB) and Campus Coffee (CC). Each firm can charge either $2.00 or $3.00 for its lattes. Below, you are provided with a payoff matrix that offers each firm's profits for all combinations of firms' strategies.
CC charges $2.00CC charges $3.00
BB charges $2.00BB: $95
CC: $95BB: $105
CC: $65
BB charges $3.00BB: $65
CC: $105BB: $80
CC: $80
Task 1: Does Books and Beans (BB) have a dominant pricing strategy? If so, what is its dominant strategy?
Task 2: Does Campus Coffee (CC) have a dominant pricing strategy? If so, what is its dominant strategy?
Task 3: Identify any Nash equilibriums in this pricing game. Hint: It is considered good form to denote outcomes by the strategy combination that gets you there, not by the resulting payoffs.
Task 4: Could the two firms do better than the Nash equilibrium by colluding and choosing another strategy?