There are two firms in the residential paint industry, Cool Shades (C) and Warm Hues (W). They collude to share the market equally. They jointly set a monopoly price and split the quantity demanded at that price. Here are their options:

i. They continue to collude (no cheating) and make $12 million each in profits.

ii. One firm cheats and the other does not. The firm that cheats makes a profit of $14 million whereas the firm that doesn't makes a profit of $9 million.

iii. They both cheat and each firm makes a profit of $7 million.

a. Construct a payoff matrix for these two firms.

b. Are the firms better off colluding (with no cheating) or competing? Explain.

c. Is there an incentive to cheat on a the collusive deal?