Consider a situation where two firms, 1 and 2, compete by choosing prices simultaneously. They can either compete (charge a low price) or cooperate (collude, charging a high price). The firms play this competition game repeatedly and indefinitely, using a grim trigger strategy to incentivize cooperation. They use the same interest rate, i , to discount future payoffs. Payoffs are $4,050 when both firms cooperate and $3,600 when they compete. If one firm charge a low price while the other charges a high price, the firm charging the low price gets $7,200, and the other gets zero. Which of the following statements is correct? (a) For any i < 1/7 the firms will cooperate (b) For any i > 1/8 the firms will cooperate (c) For i = 1/9 the firms will be indifferent between cooperating or competing (d) There is no way to sustain cooperation in this scenario
Consider a situation where two firms, 1 and 2, compete by choosing prices simultaneously. They can either compete (charge a low price) or cooperate (collude, charging a high price). The firms play this competition game repeatedly and indefinitely, using a grim trigger strategy to incentivize cooperation. They use the same interest rate, i , to discount future payoffs. Payoffs are $4,050 when both firms cooperate and $3,600 when they compete. If one firm charge a low price while the other charges a high price, the firm charging the low price gets $7,200, and the other gets zero. Which of the following statements is correct?
(a) For any i < 1/7 the firms will cooperate
(b) For any i > 1/8 the firms will cooperate
(c) For i = 1/9 the firms will be indifferent between cooperating or competing
(d) There is no way to sustain cooperation in this scenario
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