The matrix in Figure below shows payoffs based on the strategies chosen by two firms. If they collude and hold prices at $10, each firm will earn profits of $5 million. If A cheats on the agreement, lowering its price, but B does not, A will get 75 percent of the business and earn profits of $8 million and B will lose $2 million. Similarly, if B cheats and A does not, B will earn $8 million and A will lose $2 million. If both firms cut prices, they will end up with $2 million each in profits. a. Which strategy minimizes the maximum potential loss for A and for B? b. If you were A, which strategy would you choose and why? c. If A cheats, what will B do? If B cheats, will A do? d. What is the most likely outcome of such a game? Explain. B's Strategy Stand by agreement Cheat B's profit = B's profit = $8 million $5 million Stand by agreement A's profit = $5 million A's profit = -$2 million A's Strategy B's profit = -$2 million B's profit = $2 million Cheat A's profit = $8 million A's profit = $2 million

The matrix in Figure below shows payoffs based on the strategies chosen by two firms. If they collude and hold prices at $10, each firm will earn profits of $5 million. If A cheats on the agreement, lowering its price, but B does not, A will get 75 percent of the business and earn profits of $8 million and B will lose $2 million. Similarly, if B cheats and A does not, B will earn $8 million and A will lose $2 million. If both firms cut prices, they will end up with $2 million each in profits. a. Which strategy minimizes the maximum potential loss for A and for B? b. If you were A, which strategy would you choose and why? c. If A cheats, what will B do? If B cheats, will A do? d. What is the most likely outcome of such a game? Explain. B's Strategy Stand by agreement Cheat B's profit = B's profit = $8 million $5 million Stand by agreement A's profit = $5 million A's profit = -$2 million A's Strategy B's profit = -$2 million B's profit = $2 million Cheat A's profit = $8 million A's profit = $2 million

Principles of Microeconomics (MindTap Course List)

8th Edition

ISBN:9781305971493

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: Oligopoly

Section: Chapter Questions

Problem 9PA

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