Two firms compete repeatedly in a market of homogeneous goods. Each year, the firms can choose to charge a low or high price. The following payoff table summarizes their payoffs each year. The competition goes on indefinitely. Let & E (0, 1) denote the discount factor for both firms. Firm 2 Low High Low 0, 0 5, 0 High 0, 5 4, 4 Firm 1 Consider an n-period punishment trigger strategy s: • Play "High price" in the first stage. 4L our price" in the last neriod when he 5.
Two firms compete repeatedly in a market of homogeneous goods. Each year, the firms can choose to charge a low or high price. The following payoff table summarizes their payoffs each year. The competition goes on indefinitely. Let & E (0, 1) denote the discount factor for both firms. Firm 2 Low High Low 0, 0 5, 0 High 0, 5 4, 4 Firm 1 Consider an n-period punishment trigger strategy s: • Play "High price" in the first stage. 4L our price" in the last neriod when he 5.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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