Question

In the United States any contract, combination or conspiracy in restraint of trade is illegal. In practice, this means it is against the law to control or attempt to control the quantity, price or exchange of goods and services. In addition to this legal prohibition, potential conspirators face practical problems in any overt or tacit attempt at collusion. To illustrate the problems encountered, consider the following profit payoff matrix faced by two potential conspirators in a one-shot, simultaneous-move game. The first number in each cell is firm A’s profit payoff; the second number is the profit payoff to firm B.


A. Is there a dominant strategy and a Nash equilibrium strategy for each firm? If so, what are they?
B. If the firms agreed to collude and charge high prices, both would earn $25 million and joint profits of $50 million would be maximized. However, the joint high-price strategy is not a stable equilibrium.Explain.


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  • CreatedFebruary 13, 2015
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