Question

The accompanying payoff matrix presents the profits for Firm A and Firm B under two pricing strategies. Firm A's strategy High price Low price High price Firm A Profit = $83 Firm B Profit = $83 Firm A Profit = $105 Firm B Profit = $49 Firm B's strategy Low price Firm A Profit = $49 Firm B Profit = $105 Firm A Profit = $71 Firm B Profit = $71 a. First, suppose this game is indefinitely repeated. What is the optimal long-run strategy for both firms? Firm A will Set a high price Set a low price Firm B will Set a low price Set a high price b. How can either one of the firms enforce the optimal long-run strategy? The firms can decide to alternate setting high prices and low prices each period so they can take turns getting the highest available profit each period. A firm can threaten to set a low price indefinitely if the other firm does not set the high price in the previous period. Both firms will lose out on long-run profits. There is nothing either firm can do to prevent the other from deviating away from the optimal long-run strategy. c. Now suppose this game is finitely repeated. What would the equilibrium strategy for each firm be? Firm A would charge a price, and firm B would charge a price. Since the last period is equivalent to a, the incentives in this period undermine the incentives to cooperate in every period.

          The accompanying payoff matrix presents the profits for Firm A and Firm B under two pricing strategies.
Firm A's strategy
High price Low price
High price Firm A Profit = $83 Firm B Profit = $83 Firm A Profit = $105 Firm B Profit = $49
Firm B's strategy
Low price Firm A Profit = $49 Firm B Profit = $105 Firm A Profit = $71 Firm B Profit = $71
a. First, suppose this game is indefinitely repeated. What is the optimal long-run strategy for both firms?
Firm A will
Set a high price
Set a low price
Firm B will
Set a low price
Set a high price
b. How can either one of the firms enforce the optimal long-run strategy?
The firms can decide to alternate setting high prices and low prices each period so they can take turns getting the highest available profit each period.
A firm can threaten to set a low price indefinitely if the other firm does not set the high price in the previous period. Both firms will lose out on long-run profits.
There is nothing either firm can do to prevent the other from deviating away from the optimal long-run strategy.
c. Now suppose this game is finitely repeated. What would the equilibrium strategy for each firm be?
Firm A would charge a price, and firm B would charge a price. Since the last period is equivalent to a, the incentives in this period undermine the incentives to cooperate in every period.

The accompanying payoff matrix presents the profits for Firm A and Firm B under two pricing strategies.
Firm A's strategy
High price Low price
High price Firm A Profit = 83 Firm B Profit =83 Firm A Profit = 105 Firm B Profit =49
Firm B's strategy
Low price Firm A Profit = 49 Firm B Profit =105 Firm A Profit = 71 Firm B Profit =71
a. First, suppose this game is indefinitely repeated. What is the optimal long-run strategy for both firms?
Firm A will
Set a high price
Set a low price
Firm B will
Set a low price
Set a high price
b. How can either one of the firms enforce the optimal long-run strategy?
The firms can decide to alternate setting high prices and low prices each period so they can take turns getting the highest available profit each period.
A firm can threaten to set a low price indefinitely if the other firm does not set the high price in the previous period. Both firms will lose out on long-run profits.
There is nothing either firm can do to prevent the other from deviating away from the optimal long-run strategy.
c. Now suppose this game is finitely repeated. What would the equilibrium strategy for each firm be?
Firm A would charge a price, and firm B would charge a price. Since the last period is equivalent to a, the incentives in this period undermine the incentives to cooperate in every period.

Added by Joshua R.

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