Answered: In an infinitely repeated game, 2…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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* Please be advised this is for practice preperation only ** i just really need help on this - I dont undertsand

Transcribed Image Text:In an infinitely repeated game, 2 identical firms compete every period a la Bertrand. Aggregate demand is given by Q(Pmin) 10-Pmin. Both firms have constant marginal costs c (with c higher than 1 but less than 4) and no fixed costs. Firms are secretly considering a collusive strategy where they start by playing the a pre-specified collusive price på (where pe is between 5 and 8), and keep doing so until a deviation is detected. If there is a detection at any time, then firms start choosing price p = c after they see that deviation, and remain playing p = c forever. Both firms have the same discount factor & > 0. As seen in class, this proposed "Grim Trigger" strategy profile can be a SPNE only if d is above some value. Among the following four statements about the minimum & required for the collusive agreement to be an SPNE, which of them is CORRECT (if any)? = (a) The higher the pre-specified collusive price pc, the higher the minimum 8. (b) The lower the pre-specified collusive price pc, the higher the minimum 6. (c) The higher the marginal cost c, the higher the minimum 6. (d) The lower the marginal cost c, the higher the minimum 8. (e) None of the four statements is correct.

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