1. Problem #1. Consider the case of Coca-Cola versus PepsiCo, and assume the former is thinking of cutting the price of its iconic soda. If it does so, Pepsi may have no choice but to follow suit for its cola to retain its market share. This may result in a signicant drop in prots for both companies. A price drop by either company may thus be construed as detecting since it breaks an implicit agreement to keep prices high and maximize prots. Thus, if Coca-Cola drops its price but Pepsi continues to keep prices high, the former is detecting, while the latter is cooperating (by sticking to the spirit of the implicit agreement). In this scenario, Coca- Cola may win market share and eam incremental prots by selling more colas. Payoff Matrix Let's assume that the incremental prots that accrue to Coca-Cola and Pepsi are as follows: . If both keep prices high, prots for each company increase by $500 million (because of normal growth in demand) . If one drops prices (i.e., defects) but the other does not (cooperates), prots increase by $750 million for the former because of greater market share and are unchanged for the latter. . If both companies reduce prices, the increase in soft drink consumption offsets the lower price, and prots for each company increase by $250 million. The payoff matrix looks like this (the numbers represent incremental dollar prots in hundreds of millions): -' : ECoca-Cola vs. PepsiCo - E PepsiCo : iexemtrix _____________________________________________________________________________ Mm _____________________________ 992295919.5993_99__--__9_._29____, Defect ........ 7. 39.19 __________ 2. maxi