In the game depicted below, firms 1 and 2 must independently (no collusion) decide whether to charge high or low prices.   (a) What is the Nash equilibrium for the above game? (b) If the firms were able to collude, what outcome would they settle on? (c) Is there any incentive for Firms 1 and 2 to cheat on the collusive outcome? Please explain.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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In the game depicted below, firms 1 and 2 must independently (no collusion) decide whether to charge high or low prices.

 

(a) What is the Nash equilibrium for the above game?

(b) If the firms were able to collude, what outcome would they settle on?

(c) Is there any incentive for Firms 1 and 2 to cheat on the collusive outcome? Please explain.

Firm 1
High Price
Low Price
Firm 2
High Price
(10, 10)
(-5,5)
Low Price
(5,-5)
(0, 0)
Transcribed Image Text:Firm 1 High Price Low Price Firm 2 High Price (10, 10) (-5,5) Low Price (5,-5) (0, 0)
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