Edmund's Brainteasers
Problem 22
Solution
Problem 22: Competing cafés. Solution.
The Ladyhead argues as follows. Suppose Northpoint increases their prices. If we increase ours we gain 5% but if we decrease ours we gain 10% so in this case we are better to decrease. Suppose Northpoint decreases their prices. If we increase ours we lose 10% but if we decrease ours we only lose 5% so in this case too we are better to decrease. Our best strategy, therefore, is always to decrease our prices. Northpoint argues in the same way, so both decrease their prices and both lose 5% of their profits. However, if they had cooperated they would both have increased their prices and gained an extra 5% profit. Is there a moral here?