Payoffs

A payoff is an outcome that a player receives from participating in a game based on the actions they and their opponents choose. It can vary depending on the type of game. For instance, consumers might measure their payoff in utility or consumer surplus, while firms often consider profits as their payoff.

A payoff matrix is a tool that clearly displays the possible payoffs for each player given different combinations of strategies.

Consider two competing ice cream vendors at a beach, Vendor A and Vendor B. They can choose to set high or low prices for their ice creams. The payoffs are represented in dollars as profits.

In this matrix, the first number in each pair represents Vendor A's profits in dollars.

The second number is Vendor B's profits in dollars.

For example, if both vendors set high prices, each earns $100.

However, if Vendor A sets a high price while Vendor B opts for a low price, Vendor B earns $150, after the increase in quantity demanded for its product due to its new, lower price. Further, vendor A earns only $50 due to a decrease in demand for its product.