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Consider the following infinitely repeated model between two firms. Each period, the firms earn profits of 10 if they successfully collude. If a firm deviates from the agreement, it earns 15 in the period in which it cheats. In each period that the firms compete noncooperatively, they each earn profits of 8 (that is, each firm earns a profit of 8 each period from playing the one-shot non-cooperative Nash equilibrium).

-Let \(\delta\) be the discount factor of each firm. For what values of \(\delta\) can the firms sustain collusion, using the threat of non-cooperative Nash equilibrium play every period forever as punishment?

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M9677078

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