Firm2 Firm2 Low Price High Price Firm1 Low Price 10 10 25 5 Firm1 High Price 5 2

Firm2Firm2Low priceHigh priceFirm1Low price$10, $10$25, $5Firm1High price$5, $25$20, $20

Consider the following payoff matrix for two firms competing on prices. Explain why both firms might choose to sell at the low price, even though they earn higher profits when they both sell at the high price.

 

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