Due to the COVID pandemic, there is urgent need for a medical product that only two firms have the capabilities to produce. It is understood that this is a "one shot game" in that once the initial need is filed, there will be no further need for this product.

Assume that the two firms are current "colluding together" to set price so to maximize the industry profit. At this collusive price, the industry profit is $800 million - and that profit is split evenly between the two firms.

Assume also that if one firm were to cut their price, then the industry profit would fall to $600 million, but the firm that cut the price would take 75% of the market.

Finally, if both firms cut their price the industry profit would fall to $400 million - and that profit would be split evenly.

(a) Is game theory is an appropriate tool for analyzing this competitive situation? If so, why?

(a)Would you recommend that a firm cut its price or hold to the current price?

Explain your argument - using Game Theory

Cut PriceorHold Price(Select One)

(c) How, if at all, does this relate to the notion of a "prisoner's dilemma"?