Firms compete in quantities, and choose quantities simultaneously, if Cournot competition between the two firms is repeated infinitely many times, the grim-trigger strategy consists in reverting to the Nash equilibrium of the one-shot game forever following a deviation.

Given demand function, p(Q) = a-bQ, Q = q1 +q2. Total cost for firm 1 is , Total cost for firm 2 is .

1. What is the cartel profit?

2. What is the deviation profit?

3. What is the critical discount factor to sustain the collusion using grim punishment strategy?

4. Explain the impact of c on the critical discount factor.

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