Suppose firms 1 and 2 must simultaneously choose between charging a low price or

Question

Suppose firms 1 and 2 must simultaneously choose between charging a low price or a high price for their individual products. The payoff matrix is illustrated below: Firm 2 Low P High P Firm 1 Low P 6, 6 14, 5 High P 5, 14 12, 12 Note: Firm 1’s payoffs are listed first, while firm 2’s payoffs are listed second.

A. Imagine these two firms are contemplating a price fixing scheme, whereby they agree to each charge a high price. If they play this game once, is such an agreement sustainable? Explain.

B. If they play this game 5 times, with each firm adopting a tit-for-tat strategy, can we sustain cooperation? Explain.

C. If they play this game an infinite numbers of times, with each firm adopting a trigger strategy, under what specific conditions can the price fixing scheme be sustained forever? Explain.

Explanation / Answer

I am unable to form anything from this

Firm 2 Low P High P Firm 1 Low P 6, 6 14, 5 High P 5, 14 12, 12

Firm 2 Low P

Firm 1 Low P

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