Question 1

American and United choose quantities simultaneously and can compete (produce q=64) or collude (produce q=48). The firms play this game repeatedly and indefinitely, using a grim trigger strategy to incentivize cooperation and the same interest rate i to discount future payoffs. The payoff matrix below summarizes the actions and payoffs of the two companies. As before, all payoffs are in $1,000, and American's appear in the top right of each cell.

There is a 10% chance that a regulatory agency will give both firms a $4,000 fine in each period if they are caught colluding. Therefore, the expected collusion payoff is E(^C) = 4.6 0.4 = 4.2.

Hint: Assume both firms are risk-neutral and use the result t=1P(1+i)t=Pi for any payoff, P, that is constant over time.

Which of the following alternatives is correct?

Group of answer choices

For any i<1=100%, the firms will cooperate

For any i<1>

For any i>1/119.1%, the firms will cooperate

For i=1/911.1%, the firms will be indifferent between cooperating or competing

Question 2

The game below shows a situation where American Airlines operates flights in an airport that can allow the entry of another company, United Airlines. To operate flights in this airport, the rival, United, must pay a fee of F<2 dollars. The incumbent, American, can pay R dollars to have exclusive operating rights, thus preventing United's entry. If American pays for exclusive rights, United receives half of the fee. (American's payoffs appear on the left of the parentheses.)

Which of the following alternatives is correct? Hint: Recall that F<2.

Group of answer choices

American chooses to pay for exclusive rights if R>5

American chooses to pay for exclusive rights if R<4

If F=0, United is better off when American pays for exclusive rights

If American does not pay for exclusive rights, United may choose "don't enter"