If Firm A has chosen the high price, Firm B will have the choice of either getting

8 million, if they choose a high price or getting 10 million if they choose a low

price. So, the best response, the best strategy

for firm B is to charge a low price here. Okay, because 10 million is bigger than

eight. If firm A chooses a low price, then firm

B can choose between charging a high price and getting zero, and charging a low

price and getting 5 million. So, the best choice for them again, is to

charge a low price. Okay.

Now, firm A is going to take a step back. They're going to try to anticipate what's

going to happen. And charging a high price means profits

of zero for them. Charging a low price means profits of 5

million for them. So, what we expect in this game

via the technique of backward induction is that firm A charges a low price

because they anticipate that firm B is going to charge a low price as well.

So, the outcome of the game would be that both firms charge a low price.

We're basically in a Prisoner's Dilemma type situation as you've seen in previous

videos where both first do something that is individually rational, but not

collectively profit maximizing. So, in this video, we've used the concept

of the previous one, game tree. We've used the technique called backward

induction to find what the optimal strategy for a firm is, okay.

We've found, the optimal strategy for firm B, for the second mover, and

from that, we could derive what the best strategy for the first mover was.

So, we're going to have an exercise on this just after this, but for

now, thanks very much and I will see you very soon.