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There are 2 firms in the industry. if both firms charge a high price, they both earn 10 units of profit. if both charge a low price, they both earn 5 unit of profit. if one firm charges a low price while the other charges a high price, then the low-price firm earns 30 units of profit, and the high-price firm earns 0 units of profit.

(a) Write the payoff matrix for this interaction, in this format.

Firm 1 high price? low price?
Firm 2 high price? low price?

(b) Find the equilibrium outcome when the firms interact only once.

(c) The firms consider a collusion. Each firm knows that the other firm will cooperate as long as they have not been cheated. Once cheated, each firm will not cooperate ever again. You are firm 1. Your discount rate is 0.3. Compare the present value of cooperating to the present value of cheating this period.

(d) Find the highest discount rate that still deters you from cheating.

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M9491157

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