Reference no: EM132548838

Dan Murphys (DM) and BWS are the only two liquor chains in Australia that hold the rights to sell a popular new beer named Victoria Sweeter (VS).

Both Dan Murphys and BWS are contemplating between charging a high price ($60 per case) or a low price ($40 per case).

The payoff matrix below shows all possible scenarios and outcomes for the two firms.

BWSCharge $60 per caseCharge $40 per caseDan Murphys (DM)Charge $60 per caseDM: $30,000 profit

BWS: $25,000 profit

DM: $13,000 profit

BWS: $38,000 profit

Charge $40 per caseDM: $45,000 profit

BWS: $12,000 profit

DM: $19,000 profit

BWS: $20,000 profit

* Profits reported in the above table are monthly figures on the Victoria Sweeter (VS) beer only.

Required:

(a) Identify the dominant strategy for Dan Murphys in this game. Clearly explain why this is the dominant strategy.

(b) Identify the non-cooperative* Nash equilibrium for this game. Clearly explain why this is the Nash equilibrium.

(* Non-cooperative means that each firm makes their decision independently and does NOT cooperate)

(c) Notice that Dan Murphys and BWS can both earn good profits by both charging $60 per case. Clearly explain why this is NOT the non-cooperative Nash equilibrium.

(d) For Dan Murphys and BWS to both charge $60 per case and earn high profits ($30,000 and $25,000 respectively); a certain form of collusion is needed. While explicit collusion is prohibited and subject to hefty penalties in Australia, what strategy can both firms employ to achieve an implicit, tacit form of collusion? Clearly explain how