2. Two firms, TwiddleDee and TwiddleDum, make up the entire market for widgets. They have identical costs. They are currently colluding explicitly and are making $2 million each. TwiddleDee has a new CEO, Mr. Notsonice, who is considering cheating and producing more than he has agreed to produce. He has been informed by his able assistant that if he cheats, he can increase the firm’s profit by $1 million at the cost of TwiddleDum losing $1 million of its profits. If both cheat, their profits are $1.5 million each. (TwiddleDum faces the same option.) You have been hired to advise Mr. Notsonice.

a. Construct a payoff matrix for him that captures the essence of the decision.

b. If the game is only played once, what strategy would you advise?

c. How would your answer to b change if the game were to be played many times?