5.( 10 points ) Firm A and Firm B operate in a duopoly in which you and...
Question:
5.(10 points) Firm A and Firm B operate in a duopoly in which you and a rival must simultaneously decide what price to advertise in the weekly newspaper.
Firm B | |||
Low Price | High Price | ||
Firm A | Low Price | (0, 0) | (5, 5) |
High Price | (5, 5) | (3, 3) |
(In each cell in the above table the first number within brackets refers to the return for Firm A, and the second number refers to the return for Firm B).
(a) Does Firm A have a dominant strategy? If yes, what is it?
(b) Does Firm B have a dominant strategy? If yes, what is it?
(c) What is the Nash equilibrium for the one-shot simultaneous move game?
(d) If the firms were able to collude, what outcome would they agree on?
(e) Now suppose the game is infinitely repeated. If the interest rate is 10 percent, can a trigger strategy be used to enforce the collusive outcome you have identified in (d). Please explain.