se the following information for questions 7-9. Consider the following game in w
ID: 1202711 • Letter: S
Question
se the following information for questions 7-9.
Consider the following game in which each firm is deciding whether to set a low price or high price. If this game is played only once (as a simultaneous-move, one-shot game), then what will be the Nash equilibrium?
83
Now let's turn the above game into a repeated game. Suppose the firms got together and each agreed to play the following trigger strategy: I will set a high price unless and until the other firm “cheats” by setting a low price, in which case I will “punish” them by setting a low price next period and every period henceforth. Suppose the interest rate is 5%. If this game is repeated 4 times, can the trigger strategy sustain a cooperation outcome in which both firms set a high price?
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Continue to assume an interest rate of 5%. If the above game is repeated infinitely, can the trigger strategy sustain a cooperation outcome? (Refer to slides 64-67.)
Firm 2 Low price High price Firm 1 Low price 2, 2 10, -8 High price -8, 10 6, 6Explanation / Answer
When firm 1 selects Low price, firm 2 selects Low price, because it has more payout in Low price than high price. When firm 1 selects High price, firm 2 selects Low price, because it has more payout in Low price than high price.
When firm 2 selects Low price, firm 1 selects Low price, because it has more payout in Low price than High price. When firm 2 selects High price, firm 1 selects Low price, because it has more payout in Low price than high price.
Equilibrium is 2,2.
Firm 2 Low price High price Firm 1 Low price 2, 2 10, -8 High price -8, 10 6, 6Related Questions
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