Netflix and Hulu are deciding what to charge for their online streaming services. Each streaming service can choose a price of either $9 or $12 per month. There are 10 million potential customers. Of these 10 million, 1 million are loyal Netflix customers and another distinct 1 million are loyal Hulu customers. The remaining 8 million consumers will choose the streaming service that is charging the lower price. If the prices are the same, the two firms will split the market, 5 million customers each. The marginal cost of providing service for each company is 0.

(a) Suppose the two companies interact only once, and that they make their decisions simultaneously. Describe the game in matrix form and find the Nash equilibrium.

(b) Now assume this is a repeated interaction where each firm chooses $9 or $12 at the beginning of each month. Describe clearly (in words) possible strategies of each player that could sustain a "cooperative" arrangement in which they price at $12 each month. (In particular, specify how the two companies should "agree" to play the game, and what each would do in case anyone deviates or cheats on the agreement.)

(c) Suppose that the firms' monthly discount factor is r . Find the conditions under which the cooperative agreement can be sustained.