In a duopoly, firm X and firm Y decide to collude on setting a high price. If both firms cooperate by charging the high price, they can both make high profits of $50 million each. If one of the firms decides to cheat and undercut it's competitor by lowering price (while the competitor does not cheat and charges the agreed-upon high price), then it can make very high profits since it will gain market share at the expense of the competitor – the cheating firm will earn $80 million while the non-cheating firm will suffer a loss of $10 million. If both firms cheat and set a low price, then they will both make lower profits of $30 million each. The payoffs for the firms are shown in the matrix below. Charge High Price Charge Low Price Charge High Price $50, $50 -$10, $80 Charge Low Price $80, -$10 $30, $30 a. What is the dominant strategy for Firm X? What is the dominant strategy for Firm Y? b. Find the Nash equilibrium, including the payoffs that each firm makes in the equilibrium?

In a duopoly, firm X and firm Y decide to collude on setting a high price. If both firms cooperate by charging the high price, they can both make high profits of $50 million each. If one of the firms decides to cheat and undercut it's competitor by lowering price (while the competitor does not cheat and charges the agreed-upon high price), then it can make very high profits since it will gain market share at the expense of the competitor – the cheating firm will earn $80 million while the non-cheating firm will suffer a loss of $10 million. If both firms cheat and set a low price, then they will both make lower profits of $30 million each. The payoffs for the firms are shown in the matrix below. Charge High Price Charge Low Price Charge High Price $50, $50 -$10, $80 Charge Low Price $80, -$10 $30, $30 a. What is the dominant strategy for Firm X? What is the dominant strategy for Firm Y? b. Find the Nash equilibrium, including the payoffs that each firm makes in the equilibrium?

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter10: Monopolistic Competition And Oligopoly

Section: Chapter Questions

Problem 4SCQ: Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly...

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