Consider a situation where two firms who normally compete in prices decide to form a cartel....

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Consider a situation where two firms who normally compete in prices decide to form a cartel. They implement a grim trigger pricing strategy where they each receive half of the monopoly profits when the collude, but if either defects (claiming all the monopoly profits for themselves), they revert back to the Bertrand equilibrium and earn zero profits forever after. Suppose now that this market is growing by a constant rate g every period. (a) If p = 0.4 for each firm, what is the minimum growth rate, g, required to sustain collusion? (b) If p = 0.8, for each firm, what is the minimum growth rate, g, required to sustain collusion? Can collusion be sustained if the market is shrinking in this case? Consider a situation where two firms who normally compete in prices decide to form a cartel. They implement a grim trigger pricing strategy where they each receive half of the monopoly profits when the collude, but if either defects (claiming all the monopoly profits for themselves), they revert back to the Bertrand equilibrium and earn zero profits forever after. Suppose now that this market is growing by a constant rate g every period. (a) If p = 0.4 for each firm, what is the minimum growth rate, g, required to sustain collusion? (b) If p = 0.8, for each firm, what is the minimum growth rate, g, required to sustain collusion? Can collusion be sustained if the market is shrinking in this case?