Say that two firms supply the entire quantity of a good in a market, and that ba

Question

Say that two firms supply the entire quantity of a good in a market, and that barriers exist which prevent other firms from entering the market. The two firms agree to limit the quantity they produce to raise the market price. The situation is as described in the figure at the link below http://drive.google.com/file/d/ItTTM6d72UGY41ZLDLuvRm3jdRR2vol2q/view?usp-sharing 4.2· The dominant strategy is: O A. Defect O B. Cooperate O C. It depends what the other player does O D. There is no dominant strategy Continue without saving

Explanation / Answer

To solve such games we follow the following strategy. ( Cooperate =C, Defect = D)

1). If player1 choose C then we see what is best strartegy for p2 . P2 will get 3 from C and 4 from D . So the best strategy would be choosing D.

2).  If player1 choose D then we see what is best strartegy for p2 . P2 will get 1 from C and 2 from D . So the best strategy would be choosing D.

So here we see that p2 will choose D no matter what P1 chooses. So we say that D is its dominant strategy.

3). We repeat above steps for p2 and will get same result in this game as payoffs for both the players are same. So here even p2 has D as the dominant strategy.

Nash equilibrium: Here it will be (Defect, Defect) because both will go with there dominant strategies.

Answer: Option a

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