Black and White are the two and only producers of piano keys. The firms are iden

Question

Black and White are the two and only producers of piano keys. The firms are identical. Despite it being illegal, the two firms decide to collude: to restrict output and raise the price. With the deal in place, the firms can earn the maximum monopoly profit and share it equally Black's strategies But each firm wants a bigger share of the market. They play a prisoners' dilemma game. The table shows the payoff matrix for the game they are playing Break agreement Keep agreement $0 -$5m Find the equilibrium of the game. The Nash equilibrium is that Black Break agreement and White . sO $14m 0 A. keeps agreement, breaks agreement O B. breaks agreement breaks agreement O c. keeps agreement; keeps agreement 0 D. breaks agreement; keeps agreement White's strategies $14m $10m Keep agreement -$5m $10m

Explanation / Answer

If Black breaks the agreement, white's best response will also be to break the agreement because they face a loss of $5m if they keep the agreement. Also if Black keeps the agreement, White's best response is to break the agreement because they gain more profit by breaking the agreement.

Thus White will always break the agreement.

The same is the case for Black and thus both will always break the agreement.

However if they were allowed to negotiate, they would both keep the agreement as then they will both be earning profits.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.