Question
Two gas stations in a rural town can engage in collusion over pricing. Because drivers often just stop at the first station they see as
Two gas stations in a rural town can engage in collusion over pricing. Because drivers often just stop at the first station they see as they go through town, price competition is not that severe in the first place. Assume either station can price gas at $0.30 above average total cost or $0.50 above average total cost. If they have equal prices, they split the market. If they have unequal prices, the lower price station gets 75% of the market (assume for simplicity no change in the size of the market; price elasticity of demand is very low for short term changes in the price of oil). a. Draw the normal form representation of this game. Identify the key aspects of the game. b. Identify the dominant strategy, if any, for each player. c. Identify any Nash equilibria.
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