[2] Consider a pricing game with strategies and payoffs as shown in the table below. Firm B Low Price Low 0,0 Firm A High -40, 50 (a) What is the Nash equilibrium if this were to be a one-shot, simultaneous-move pricing game? High 50, -40 10, 10 (b) Suppose firm A and B repeatedly play this game forever, and the interest rate is 20 percent. Also, the firms agree to charge a high price in each period, provided neither has cheated in the past. What are firm A's profits if it cheats on the collusive agreement? What are firm A's profits if it does not cheat on the collusive agreement? Does an equilibrium result where the firms charge the high price in each period?

[2] Consider a pricing game with strategies and payoffs as shown in the table below. Firm B Low Price Low 0,0 Firm A High -40, 50 (a) What is the Nash equilibrium if this were to be a one-shot, simultaneous-move pricing game? High 50, -40 10, 10 (b) Suppose firm A and B repeatedly play this game forever, and the interest rate is 20 percent. Also, the firms agree to charge a high price in each period, provided neither has cheated in the past. What are firm A's profits if it cheats on the collusive agreement? What are firm A's profits if it does not cheat on the collusive agreement? Does an equilibrium result where the firms charge the high price in each period?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter15: Strategic Games

Section: Chapter Questions

Problem 9MC

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