4. (6 points) Refer to the following payoff matrix, which represents possible pr

Question

4. (6 points) Refer to the following payoff matrix, which represents possible profits for two firms competing in an oligopoly market. X's Possible prices $40 $35 A$57 B$59 $60 $55 C$50 D $55 $69 $58 First, assume this is a one-time game with no collusion between the firms. What would you expect to happen? a. b. Now assume this is a repeated game (rather than a one-time game) and that the interaction between the two firms occurs indefinitely. Why might collusion with a credible threat not be necessary to achieve the $60/S57 outcome? 50000

Explanation / Answer

a) In a one-shot game with no collusion, both firm behave according to their dominant strategies. Both have dominant strategy to select $35. If Y selects $35, X has a higher profit in selecting $35 as well ($50 vs $55). And same is true for Y. Hence if both operate according to their dominant strategy, they choose $35 and simultaneous equilibrium results in a lower profit quardent of ($35 $35)

b) Overtime they experience the results and find that collusion agreement to charge $40 will result in highger payoff. But this quardent with profits $60 and $57 may not be a credible threat because if one firm deviates and breaches the agreement, it could earn $69 or $59 which is more than the current collusive profit

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