At a time when demand for ready-to-eat cereal was stagnant, a spokesperson for t

Question

At a time when demand for ready-to-eat cereal was stagnant, a spokesperson for the cereal maker Kellogg’s was quoted as saying, “ . . . for the past several years, our individual company growth has come out of the other fellow’s hide.” Kellogg’s has been producing cereal since 1906 and continues to implement strategies that make it a leader in the cereal industry. Suppose that when Kellogg’s and its largest rival advertise, each company earns $1 billion in profits. When neither company advertises, each company earns profits of $9 billion. If one company advertises and the other does not, the company that advertises earns $49 billion and the company that does not advertise loses $4 billion.

For what range of interest rates could these firms use trigger strategies to support the collusive level of advertising?

Instruction:

Enter your answer as a percentage rounded to the nearest whole number. i percent

Explanation / Answer

Given cases can be inter[reted as follows

Collusion is profitable under the usual trigger strategies
if (Cheat- Coop ) / (Coop- N ) (1 / i)

In our case Cheat = 49
Coop = 9
N = 1

Cheat is one is Yes, other is No
Coop is Cooperate
N is No Advertising

After substituting values,
($49 - $9) / ($9 - 1) = 5 (1 / i)
So 5(1/i)
i(1/5)
i20%
So requirement is for the interest rate to be less than 20 percent

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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