**Oligopoly Game Theory Educational Discussion:**1. **Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries.** In oligopolistic markets, firms are highly interdependent, meaning the actions of one company significantly impact others. A payoff matrix, which displays potential outcomes for each firm's strategies, can be used to analyze this interdependence. By comparing different strategies, firms can anticipate competitors' moves and potential responses, highlighting how one's pricing or production decisions are closely linked to the actions of rivals.2. **Assuming no collusion between X and Y, what is the likely pricing outcome?** Without collusion, each firm independently chooses its pricing strategy, potentially leading to competitive pricing. In many cases, this results in prices similar to those in competitive markets, where firms may undercut each other to gain market share, eventually reaching a Nash equilibrium where no firm can benefit from changing its price while the other keeps theirs constant.3. **In view of your answer to question 2, explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement?** Collusion allows firms to act as a cartel, setting prices above competitive levels to maximize collective profits. Despite the mutual benefits, the temptation to cheat arises because individual firms might increase their profits further by secretly undercutting the agreed price to gain a larger market share. However, if all firms cheat, it could lead to a price war, eroding profits more than if they complied with the collusive agreement. **Oligopoly Game Theory****Payoff Matrix Diagram:**The diagram is a 2x2 payoff matrix illustrating the possible outcomes for two firms, X and Y, based on their pricing strategies. The rows represent Y's possible prices ($40 and $35), and the columns represent X's possible prices ($40 and $35). Each cell of the matrix shows two numbers, with the number in the upper left representing X's profit, and the number in the lower right representing Y's profit.- **Cell A:** X prices at $40, Y prices at $40. X's profit is $57, Y's profit is $69.- **Cell B:** X prices at $35, Y prices at $40. X's profit is $59, Y's profit is $50.- **Cell C:** X prices at $40, Y prices at $35. X's profit is $50, Y's profit is $55.- **Cell D:** X prices at $35, Y prices at $35. X's profit is $55, Y's profit is $58.**Questions:**a. Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries.b. Assuming no collusion between X and Y, what is the likely pricing outcome?c. In view of your answer to b, explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement?**Answer:**

a. Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries. b. Assuming no collusion between X and Y, what is the likely pricing outcome? c. In view of your answer to b, explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement? Answer:

a. Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries. b. Assuming no collusion between X and Y, what is the likely pricing outcome? c. In view of your answer to b, explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement? Answer:

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

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Question

**Oligopoly Game Theory Educational Discussion:**

1. **Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries.**

In oligopolistic markets, firms are highly interdependent, meaning the actions of one company significantly impact others. A payoff matrix, which displays potential outcomes for each firm's strategies, can be used to analyze this interdependence. By comparing different strategies, firms can anticipate competitors' moves and potential responses, highlighting how one's pricing or production decisions are closely linked to the actions of rivals.

2. **Assuming no collusion between X and Y, what is the likely pricing outcome?**

Without collusion, each firm independently chooses its pricing strategy, potentially leading to competitive pricing. In many cases, this results in prices similar to those in competitive markets, where firms may undercut each other to gain market share, eventually reaching a Nash equilibrium where no firm can benefit from changing its price while the other keeps theirs constant.

3. **In view of your answer to question 2, explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement?**

Collusion allows firms to act as a cartel, setting prices above competitive levels to maximize collective profits. Despite the mutual benefits, the temptation to cheat arises because individual firms might increase their profits further by secretly undercutting the agreed price to gain a larger market share. However, if all firms cheat, it could lead to a price war, eroding profits more than if they complied with the collusive agreement.

**Oligopoly Game Theory**

**Payoff Matrix Diagram:**

The diagram is a 2x2 payoff matrix illustrating the possible outcomes for two firms, X and Y, based on their pricing strategies. The rows represent Y's possible prices ($40 and $35), and the columns represent X's possible prices ($40 and $35). Each cell of the matrix shows two numbers, with the number in the upper left representing X's profit, and the number in the lower right representing Y's profit.

- **Cell A:** X prices at $40, Y prices at $40. X's profit is $57, Y's profit is $69.
- **Cell B:** X prices at $35, Y prices at $40. X's profit is $59, Y's profit is $50.
- **Cell C:** X prices at $40, Y prices at $35. X's profit is $50, Y's profit is $55.
- **Cell D:** X prices at $35, Y prices at $35. X's profit is $55, Y's profit is $58.

**Questions:**

a. Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries.

b. Assuming no collusion between X and Y, what is the likely pricing outcome?

c. In view of your answer to b, explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement?

**Answer:**

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