Chapter 12R, Problem 21MCQ

To determine

The correct option that defines the action of DD player under oligopolistic competition.

Answer to Problem 21MCQ

Option c is correct.

Explanation of Solution

Explanation for correct option:

c.

Player DD chose tit-for-tat strategy where low prices should be charged as Player FF did in the previous period. It is win-win situation for bother players if tit-for-tat strategy is followed. Therefore, option c is correct

Explanation for incorrect options:

a.

Player DD will go out of business if it is not able to lower the prices as per prices charged by Player FF. Therefore, option a is incorrect.

b.

If player charged higher prices then it would not be able to sell their products in the market. Therefore, option b is also incorrect.

d.

In this, player DD will charge low prices as it followed cooperative strategy or tit-for-tat strategy. Nash equilibrium is a non cooperative strategy where players make decisions for self benefits. Therefore, option d is incorrect.

e.

Forming a cartel refers to the group formation where prices are charged higher to increase the profit of each firm in the industry. Therefore, option e is incorrect.

Economics Concept Introduction

Tit-for-tat: It is a strategic behavior of the firm where it acts cooperatively at first then it acts according to the competing firm did in the previous period. It can also be said as the reward that is offered to the other player for cooperation.