Consider the following two strategies for a firm:

Strategy A: The firm can choose to cooperate with another firm to get the half profit of

the whole market for each period, which is /2

Strategy B: The firm can choose to "Cheat" in the beginning and get the whole profit of the market, which is . Then, for the remaining periods, this firm will be "kicked out" from the market and get 0 profits.

Assume the time considered here is INFINITY. The interest rate is .

Please calculate the present values for these two strategies and choose the optimal

strategy for this firm.

Hint: = + + ² + ³ + = /1-x , when time goes to infinity. 1

1. Your choice will be decided by the value of .