9. Two firms, Faster and Quicker, are the only two producers of sports cars on an island that has no contact with the outside world. The firms collude and agree to share the market equally. If neither firm cheats on the agreement, each firm makes $3 million in economic profits. If only one firm cheats, the cheater can increase its economic profit to $4.5 million, while the firm that abides by the agreement incurs an economic loss of $1 million. If both firms cheat, they earn zero economic profit. Neither firm has any way of policing the actions of the other.

a. What is the payoff matrix of the game if it is played just once?

b. What is the equilibrium if the game is played only once? Explain.

c. What do you think will happen if the game can be played many times? Why?

d. What do you think will happen if a third firm comes into the market? Will it be harder or easier to achieve cooperation among the three firms?

Why?