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Home » Economics Homework Help » Microeconomics Help » Dominant Strategy
Dominant Strategy
How can firms decide about the optimal choice of a strategy? Some strategies may be successful that in more profitable) if competitors make a particular choice that is take a certain decision but will not be successful if competitors make other choices on the other hand a dominant strategy is one which will be successful or optimal for a firm regardless of what others do that is no matter what strategy the rival firms adopt.

Let us illustrate the dominant strategy in case of duopoly in te choice of whether to advertise or not. In these case deciding in favour of advertising by a firm to promote its sales and hence profits or deciding not to advertise are the tow strategies thus advertising or not advertising are the tow strategies between which each firm has to make a choice. We assume there are two firms A and VB which have to make a choice between the two strategies. The outcome (or profits made) form the various combinations of two strategies chosen by the two firms are presented in the following table in the form of payoff matrix. It should be noted be noted that outcome or profits made by a firm by adoption a strategy is influenced by the choice of a particular strategy by the rival firm.

Payoff matrix for advertising game

      FIRM B  
    Advertising   Not advertising
  Advertising A : 10
B :   5
  A : 15
B :   0
FIRM A          
  Not advertising A : 6
B :  8
  A : 10
B :   2

It will be seen from the payoff matrix that if both firms adopt the strategy of advertising the firm A will make profits of 10 crores and firm B will earn profit of 5 crores. If firm A decides to advertise and firm B decides no to advertise profits of firm A are 15 crores and of firm B is zero. Similarly if firm A decides not to advertise but firm B decides in glamour of advertising firm makes profits of 6 crores and B of 8 crores. Further if both firms go in for not advertising profit of A are 10 crores and of B are 2 crores.

From the payoff matrix of the advertising game given in the similar conclusion can be drawn for the optimal strategy to be adopted by firm B. let us state the choices that are open to firm B if firm A adopts strategy of advertising the firm B makes profits of 5 crores if it also chooses strategy of advertising and zero if it chooses strategy of not advertising thus choice of strategy of advertising by firm B is better if firm A opts for the strategy of advertising on the other hand if firm A chooses strategy of not advertising profit of firm b are 8 crores if it chooses strategy of advertising and 2 crores if it adopts strategy of not advertising thus in this case too choice of strategy of advertising by firm B is optimal whatever strategy the firm A adopts thus strategy of advertising is a dominant strategy for firm B.

Since it is assumed that both firms behave relationally each of them will choose the strategy of advertising and he outcome will be profits of $ 10 crores for firm A and $ 5 crores for firm B.

It is important to note that all games do not have a dominant strategy for each player. To make it clear we make some changes in the payoff matrix and present them in the payoff matrix and present them in the payoff matrix in differs from the previous payoff matrix in that profit shown in the bottom right hand Conner are different they are $ 20 crores for firm A and $ 2 crores for firm B in case both adopt the strategy of not advertising.

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