Use the information in the following table, which summarizes the payoffs (i.e., profit) to two firms that must decide between an average-quality and a high quality product, to answer the questions that follow:

Firm 2
Average Quality High Quality
Firm 1 Average Quality 600, 600 400, 1100
High Quality 1100, 400 900, 900

a. What is each player's dominant strategy? Explain your reasoning.

b. Referring to the table above, is this an example of a prisoner's dilemma game? Why or why not?

c. Is there a Nash equilibrium? If so, what is it?

a. Firm 1's dominant strategy is to go with the high quality product. Note that if firm 2 decides to go with the average quality product, firm 1 maximizes its profits by choosing the high quality product. If firm 2 decides to go with the high quality product, firm 1 is still best off choosing the high quality product as well. Using the same reasoning, firm 2's dominant strategy is to go with the high quality product.

b. This is not an example of the prisoner's dilemma. Note that each party is as well off as they would be with cooperation. Joint profits are maximized when each firm chooses to go with the high quality product.

c. The dominant strategies comprise the Nash equilibrium. Each firm knows that the other firm will choose the high quality product. Thus, it does likewise.