Suppose that both firms adopt the grim trigger strategy. They continue charging the high price unless one of them cheats. Upon one of them charging the low price, they play the equilibrium, low-price strategy for the rest of the game. What has to be true about the interest rate (r) for cooperation to be sustainable? Or<25% Or> 25% Or<50% Or > 50%

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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6

Firm 1
low
high
low
in
high
5 20
0
0 20 10 10
The firms simultaneously set prices at regular intervals. In the equilibrium of this game (if played only once), each firm selects the low price.
However, the firms are playing this game repeatedly, for an infinite period of time. The firms utilize trigger strategies in order to maintain the
collusive outcome.
Suppose that both firms adopt the grim trigger strategy. They continue charging the high price unless one of them cheats. Upon one of them
charging the low price, they play the equilibrium, low-price strategy for the rest of the game. What has to be true about the interest rate (r) for
cooperation to be sustainable?
Or<25%
Or> 25%
Or< 50%
Or> 50%
Transcribed Image Text:Firm 1 low high low in high 5 20 0 0 20 10 10 The firms simultaneously set prices at regular intervals. In the equilibrium of this game (if played only once), each firm selects the low price. However, the firms are playing this game repeatedly, for an infinite period of time. The firms utilize trigger strategies in order to maintain the collusive outcome. Suppose that both firms adopt the grim trigger strategy. They continue charging the high price unless one of them cheats. Upon one of them charging the low price, they play the equilibrium, low-price strategy for the rest of the game. What has to be true about the interest rate (r) for cooperation to be sustainable? Or<25% Or> 25% Or< 50% Or> 50%
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