Say that two firms supply the entire quantity of a good in a market, and that ba

Question

Say that two firms supply the entire quantity of a good in a market, and that barriers exist which prevent other firms from entering the market. The two firms agree to limit the quantity they produce to raise the market price. The situation is as described in the figure at the link below http://drive.google.com/file/d/1tTTM6d72UGY4TZLDLuvRm3jdRR2vo12q/view?usp-sharing 4.3. The Nash equilibrium is O A. Both firms cooperate B. Both firms defect O C. Firm 1 cooperates, Firm 2 defects O D. Firm 2 cooperates, Firm 1 defects Continue without saving

Explanation / Answer

Looking at the strategies selected by the players equilibrium is a defect defect. Note that defect is the dominant strategy for both the players. When firm 2 decides to co-operate firm 1 has a higher pair in selecting defect. Similarly when firm 2 is deciding to defect firm 1 is again earning a higher pay off by defecting. The same is true for firm 2. Hence the Nash equilibrium is both selecting defect.

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