General Instructions

The Tampa Tribune and the St. Petersburg Times compete for readers in the Tampa Bay market for newspapers. Recently, both newspapers considered changing the prices they charge for their Sunday editions. Suppose they considered the following payoff table for making a simultaneous decision to charge either a low price of $0.50 or a high price of $1.00.  Tampa’s profits are shown in regular type.  St. Petersburg’s profits are shown in bold.

 For questions 1 – 10, choose the correct answer to fill in the blanks. Use the suggested words in parentheses after each blank.  A detailed explanation must be given to defend each choice.

1. Tampa Tribune's dominant strategy is ____________ (low price, high price, it has no dominant strategy).

2. St. Petersburg Times' dominant strategy is ____________ (low price, high price, it has no dominant strategy).

3. Tampa Tribune's dominated strategy is ____________ (low price, high price, it has no dominant strategy)

4. St. Petersburg Times' dominated strategy is ____________ (low price, high price, it has no dominant strategy).

5. This newspaper pricing decision ________ (is, is not) a Prisoners' Dilemma.

6. Is there a Nash Equilibrium in this game?  If so, which cell(s) is/are the Nash?  Is/are the Nash Dominant Strategy Equilibrium?

7. Which cell(s) is/are strategically stable?

Use the following game to answer questions 8-10.  Be sure to show all of your math step-by-step.

Alcoa and Kaiser, duopolists in the market for primary aluminum ingot, choose prices of their 500 foot rolls of sheet aluminum on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they can make.

7. Suppose Alcoa and Kaiser repeat their pricing decision on the first day of every month. Suppose they have been cooperating for the past few months, but now the manager at Kaiser is trying to decide whether to cheat or to continue cooperating. Kaiser’s manager believes Kaiser can get away with cheating for two months, but he also believes that Kaiser would be punished for the next two months after cheating. After punishment, Kaiser’s manager expects the two firms would return to cooperation. Kaiser’s manager ignores the time-value of money and does not discount future benefits or costs.