Question

In the following matrix for the profits of two pizza firms with the decision whether or not to offer “free delivery” what is the dominant outcome. Use the check mark system to explain why.

	You deliver	You don’t deliver
Rival delivers	Rival gets $3000 You get $3000	Rival gets $5000 You get $4000
Rival doesn’t deliver	Rival gets $4000 You get $5000	Rival gets $6000 You get $6000

Answer 1

Strategy	You deliver	You don't deliver
Rival deliver	(3000, 3000)	(5,000, 4,000)
Rival don't deliver	(4000, 5000)	(6000, 6000)

To determine the dominant outcome, consider the following steps:

1. If you deliver, what is the best strategy of the rival? The answer is rival don't deliver as his pay off is more if he don't deliver. Mark it in table.

2. If you don't deliver, the rival will again choose to not deliver. His payoff will be $6000 otherwise it would have been $5000. Mark it in table.

The dominant outcome for rival is clearly to not deliver the pizza irrespective of what you choose to do.

3. Now, if rival choose to not deliver what is your best strategy? By camparing the payoff, you will definitely benefit if you also choose to not deliver. This is your best reponse towards the strategy of your rival. Mark it in the table.

By looking at all outcomes, it is clear that the dominant outcome for both will be to not deliver pizza. It is also known as equilibrium in dominant strategy.

For any query, please comment.