# Temple University Department of Economics

Economics 92
Principles of Microeconomics
Spring 2000

 A First Game: The Price of a Philly Cheese Steak

 First name Last name

There are two Philly Cheese Steak restaurants in South Philadelphia, Pat's and Sal's. They produce premium grade sandwiches for wholesale distribution. There are three choices for the wholesale price of a sandwich: \$4, \$4.50, \$5.00. The cost of making a sandwich is constant and is the same for both vendors. By popular acclaim, Pat's Steaks are the best. The payoff table, or strategic form of the game is shown below.  In any cell, the first entry corresponds to sandwiches sold by Pat, the second entry corresponds to sandwiches sold by Sal.

 Sal \$4 \$4.50 \$5 Pat \$4 750, 250 800, 200 1000, 0 \$4.50 700, 300 750, 250 800, 200 \$5.00 600,   400 700, 300 750, 250
1. Suppose that Pat has announced that in order to preserve brand identity he will always charge \$5.00. What price should Sal charge? Pat and Sal are only concerned with unit sales, not \$ sales.

2. Suppose that Sal announces that he will always take the low road and charge \$4, no matter what. How much should Pat charge? They are still only concerned with unit sales.

3. Now suppose that Pat and Sal must announce their pricing decisions simultaneously. They no longer adhere to the pricing rules that they may have used in the previous two questions. What price strategy should Sal use in order to maximize unit sales?

4. Pat and Sal must announce their pricing decisions simultaneously. They no longer adhere to the pricing rules that they may have used in the first two questions. What price strategy should Pat use in order to maximize unit sales?

5. Reconstruct the table with the payoffs stated in terms of dollar sales rather than unit sales.  If Pat and Sal are revenue maximizers rather than unit sales maximizers, what prices will they charge.  (Hint: First find Sal's best strategy, regardles of what Pat chooses.  Because Pat has the table available to him he knows what strategy Sal will choose, and so Pat makes his choice on that basis.)
Sal's choice   Pat's Choice