Suppose only two firms, Tying-the-Knot and Bridezilla-No-More, offer high-class wedding planning services. The following payoff matrix shows the profit (in millions of dollars) of each company, depending on whether it sets a high or low price for its services. Tying-the-Knot and Bridezilla-No-More are both profit-maximizing firms. Bridezilla-No-More Low High Low $8, $8 $14, $4 Tying-the-Knot High $4, $14 $9, $9

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8. Understanding grim strategies
Suppose only two firms, Tying-the-Knot and Bridezilla-No-More, offer high-class wedding planning services. The following payoff matrix shows the
profit (in millions of dollars) of each company, depending on whether it sets a high or low price for its services. Tying-the-Knot and Bridezilla-No-More
are both profit-maximizing firms.
Bridezilla-No-More
Low
High
Low
$8, $8
$14, $4
Tying-the-Knot
High
$4, $14
$9, $9
The Nash equilibrium of this game is for Tying-the-Knot to set a
price and Bridezilla-No-More to set a
price.
True or False: Both firms would be better off if they cooperated and set a high price for their services, instead of using the Nash equilibrium.
True
False
Suppose that the firms play this game indefinitely. Both firms agree to cooperate in order to maintain higher profits. To deter cheating, Tying-the-Knot
announces that it will play a grim strategy.
Given this strategy, what will happen if Bridezilla-No-More breaks the cooperative agreement in the first period? Check all that apply.
Beginning in the period after cheating has occurred, both firms will be stuck in the Nash equilibrium forever.
Tying-the-Knot will play High in the second period.
Bridezilla-No-More will play Low in the second period.
Tying-the-Knot will forgive Bridezilla-No-More for cheating and return to the cooperative outcome in the third period.
Transcribed Image Text:8. Understanding grim strategies Suppose only two firms, Tying-the-Knot and Bridezilla-No-More, offer high-class wedding planning services. The following payoff matrix shows the profit (in millions of dollars) of each company, depending on whether it sets a high or low price for its services. Tying-the-Knot and Bridezilla-No-More are both profit-maximizing firms. Bridezilla-No-More Low High Low $8, $8 $14, $4 Tying-the-Knot High $4, $14 $9, $9 The Nash equilibrium of this game is for Tying-the-Knot to set a price and Bridezilla-No-More to set a price. True or False: Both firms would be better off if they cooperated and set a high price for their services, instead of using the Nash equilibrium. True False Suppose that the firms play this game indefinitely. Both firms agree to cooperate in order to maintain higher profits. To deter cheating, Tying-the-Knot announces that it will play a grim strategy. Given this strategy, what will happen if Bridezilla-No-More breaks the cooperative agreement in the first period? Check all that apply. Beginning in the period after cheating has occurred, both firms will be stuck in the Nash equilibrium forever. Tying-the-Knot will play High in the second period. Bridezilla-No-More will play Low in the second period. Tying-the-Knot will forgive Bridezilla-No-More for cheating and return to the cooperative outcome in the third period.
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