Please help with this question ~~~ The following matrix is for two firms in an o
ID: 1208026 • Letter: P
Question
Please help with this question ~~~
The following matrix is for two firms in an oligopoly industry and their decisions on how to price their products. (The amount on the left is the profit for Cody Enterprises and the amount on the right is the profit for Jakob Industries.) Using the payoff matrix, explain why the firms are interdependent. Assuming no collusion between Jakob and Cody, what is the likely pricing outcome? Given your answer in b, what is the profit for each firm? Using your answer in b, explain why price collusion might be mutually profitable. Why might it be tempting to cheat on such a collusive agreement.Explanation / Answer
Answer:
The matrix shows 4 possible profit outcomes for two industries following two different price strategies. Example: If Jokob set price at $35 and Cody at $40; then Jokob’s profits are $59,000, and Cody’s profits are $55,000.
Use the payoff matrix, explain why the interdependent?
Insofar as their profits depend not just on their own price, but also on the other industries price, Jokob and Cody are interdependent.
Assuming no collusion between Jokob and Cody, what is the likely pricing outcome? And what is the profit of each industry firm?
Likely outcome: Both industries will set price at $35.00. If either charged $40.00, the matrix shows 4 possible profit outcomes for two industries following two different price strategies as aforesaid above.
Using your answer to part b, explain why price collusion might be mutually profitable. Why might it be tempting to cheat on such a collative agreement?
Through price collusion agreeing to charge $40 each industry would achieve higher profits (Jokob = $57,000; Cody = $60,000). But once both firms agree on $40, each sees it can increase its profit even more by secretly charging $35 while its rival charges $40.