Duopoly and strategic price making When the market is dominated by a few large firms, the market structure is often described as an oligopoly. Oligopoly firms make price and output decisions strategically by taking into account their opponents' anticipated reactions. The following question requires you to consider the strategic decisions of a duopoly. Imagine two big supermarkets—Colemart and Woolmart—are selling similar grocery products. If they compete by charging a lower price, they will each make a profit of $2 million. If one supermarket raises its price, it will lose customers to the other and make a smaller profit of $1 million, whereas its competitor earns a bigger profit of $4 million. However, if both supermarkets charge a high price, they each earn a big profit of $3 million. Draw a payoff matrix to represent this duopoly game. What is the likely outcome of the game?
