Not collude Collude Not A: medium prom collude A: higher proms B: lower prorts B

Question

Not collude Collude Not A: medium prom collude A: higher proms B: lower prorts B: lower prorts FirmA A: lower pronts A: medium pronts Collude B: higher prons B: higher pronts Figure 14.1a Suppose there are two rival firms with the game table illustrated in Figure 14.1A) by colluding to restrict output. both firms can earn higher profits. Which of the following statements will be true for these two firms? A) Only firm A has a dominant strategy: it should cheat on the agreement. B) Only firm B has a dominant strategy: it should cheat on the agreement. C) Neither firm A nor firm B has a dominant strategy D) There is no unique Nash equilibrium in this game. .

Explanation / Answer

D) is correct

There is no unique Nash equilibrium. There exist two Nash equilibria. One is that A and B do not collude and A does not collude but firm B Colludes.

When A does not collude he gets medium profit and when it Colludes it gets lower profit, given B chooses not to collude. When B Colludes A gets higher profit when it does not collude and medium profit when it colludes. So firm A chooses not to collude.

Firm B gets lower profit when A does no collude in both cases, and gets higher profit when A colludes in both cases.

Hence two Nash equilibria exist.

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.