In a market with two firms, a firm that has a dominant strategy will do which of the following?

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BlackTom AI · Accepted Answer

Question restatement: In a market with two firms, a firm that has a dominant strategy will do which of the following?

Option 1: 'Make the first move, and wait to see whether its competitor responds to the move.' This describes a strategic approach that depends on anticipating the other player's reaction, typical of games where moves are sequential or where one player has to react. A dominant strategy, by contrast, yields the same best choice regardless of the other player's action, so this option mischaracterizes dominance as requiring a first-mover edge or reactive sequencing.

Option 2: 'Maintain that strategy independent of the strategies chosen by its competitor.' This aligns with the core idea of a dominant strategy: a single action that is the best response no matter what the other firm does. If a firm has a dominant strategy, choosing it yields the best payoff regardless of the opponent's move, making this option a correct representation of dominance.

Option 3: 'Collude with its competitor to reduce uncertainty.' Collusion involves cooperation between firms to raise joint profits or reduce uncertainty, but dominance is a property of a firm’s own payoff structure, not a description of collusive behavior. A dominant strategy can exist in competitive settings without any collusion, and the term itself does not imply cooperation.

Option 4: 'Adjust its strategies based on the strategies chosen by its competitor.' This describes a contingent or best-response strategy, where a firm chooses actions after observing or predicting the rival’s move. Dominant strategies do not depend on the opponent’s actions; they are the best regardless of what the opponent does.

Option 5: 'Keep its competitor guessing about its next move.' While keeping the rival uncertain might be a strategic behavior in some contexts, a dominant strategy is defined as the single best action regardless of the rival's choice. This option suggests strategic ambiguity rather than a fixed dominant choice, which does not reflect the notion of dominance.

Summary of reasoning across options:
- The concept of a dominant strategy implies a single action that yields the highest payoff no matter what the other firm does, so any option implying independence from the rival’s choices or a fixed best response fits this idea.
- Options describing sequential moves, contingent reactions, collusion, or strategic ambiguity fail to capture the essence of dominance, since they rely on the opponent’s actions or external coordination rather than a fixed superior choice.
- Therefore, the option stating that the firm should 'Maintain that strategy independent of the strategies chosen by its competitor' correctly reflects the definition of a dominant strategy, while the others describe related but distinct strategic ideas or behaviors.

AP Economics-Hillebrand Micro Unit 4 Exam v2- Requires Respondus LockDown Browser

In a market with two firms, a firm that has a dominant strategy will do which of the following?

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