The pencil market is controlled by two firms: AAA Pencil Company and BBB Manufacturing. The structure of the market makes secret price cutting impossible. Each firm announces a price at the beginning of the time period and sells pencils at the price for the duration of the period. There is very little brand loyalty among pencil buyers so that each firm’s demand is highly elastic. Each firm’s prices are thus very sensitive to inter-firm price differentials. The two firms must choose between a high and low price strategy for the coming period. Profits (measured in thousands of Rands) for the two firms under each price strategy are given in the payoff matrix below. AAA – low price AAA – high price BBB – low price 60, 60 250, -20 BBB – high price -20, 250 130, 130

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The pencil market is controlled by two firms: AAA Pencil Company and
BBB Manufacturing. The structure of the market makes secret price
cutting impossible. Each firm announces a price at the beginning of
the time period and sells pencils at the price for the duration of the
period. There is very little brand loyalty among pencil buyers so that
each firm’s demand is highly elastic. Each firm’s prices are thus very
sensitive to inter-firm price differentials. The two firms must choose
between a high and low price strategy for the coming period. Profits
(measured in thousands of Rands) for the two firms under each price
strategy are given in the payoff matrix below.

AAA – low price

AAA – high price

BBB – low price

60, 60

250, -20

BBB – high price

-20, 250

130, 130

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