FIGURE 9 PRISONER’S DILEMMA GAME BETWEEN TWO FIRMS
imageIntense competition between Shoe Carnival and Shoe Festival results in both stores pricing their products low, resulting in a Nash equilibrium payoff of $28,000 for Shoe Carnival and $25,000 for Shoe Festival. However, another outcome provides a greater profit for both stores, that is, if both stores price high. But because the two stores cannot openly collude, and neither trusts the other to maintain high prices, both stores end up pricing their products low, resulting in lower profits.