5) Tacit Collusion

Another way firms can avoid the Bertrand paradox, or an otherwise undesirable outcome in a prisoners' dilemma situation, is by colluding tacitly through repeated interactions. To see this, consider the following simultaneous-move pricing game between Firm A and Firm B, where the payoffs are in terms of thousands of dollars per day:

\f5) Tacit Collusion (Part c) Suppose that instead of just playing once, these firms will play the game an infinite number of times. Suppose each firm plays the grim trigger strategy - each firm will charge a high price as long as the other charges a higher price, but if one lowers their price, then the other will charge a low price from that point on, forever. Under these circumstances, for what values of the discount factor 6 = Towhere r is the interest rate, will cooperation at the high price, high price outcome be sustainable? Cooperation is sustainable if d > 0.60 when the firms use the grim trigger strategy (express your answer as a decimal, with one digit before the period and two digits after).5) Tacit Collusion (Part d) Suppose again that instead of just playing once, these firms will play the game an infinite number of times. Suppose now though, that each firm plays the tit- for-tat strategy - each firm will charge a high price in the first game and then from then on do whatever the other firm did in the previous game. Under these circumstances, for what values of the discount factor o = 1, wherer is the interest rate, will cooperation at the high price, high price outcome be sustainable? Cooperation is sustainable if o > 0.5 when the firms use the tit-for-tit strategy (express your answer as a decimal, with one digit before the period and two digits after). 1 point 5) Tacit Collusion (Part e) Using your answers from the previous two questions (parts c and d), explain whether in this case, cooperation is more likely when the firms use the grim trigger strategy or the tit-for-tat strategy and why. Edit View Insert Format Tools Table 12pt * Paragraph BIYA V T2 v