5. The following payoff matrix shows the profits (in millions) of two colluding

Question

5. The following payoff matrix shows the profits (in millions) of two colluding firms. If they both stick to their original agreement, they will equally split $500 million in available profits. ACE stick to agreement Break agreement Cell A Cell B stiek to agreement 250 230 250 200 PACE Cell Cell D Break agreement 200 210 280 210 a) If Pace decides to break their original agreement, what profit share will Pace receive if Ace sticks to the million b) If Ace decides to break their original agreement, what profit share will Ace receive if Pace sticks to the million c) If Ace decides to stick to their original agreement, what profit share will Ace receive if Pace breaks the d) If Pace decides to stick to their original agreement, what profit share will Pace receive if Ace breaks the e What profit share will each company receive if they both break their agreements? Which cell (A, B, C, or D) represents the outcome if both firms want to mutually maximize profits? What is each company's profit share? g Which cell (A, B, C, or D) represents the most likely outcome (the Nash equilibrium)? h) In a sentence or two, explain why your answer from (g) is the most likely outcome. (2 marks)

Explanation / Answer

a) If Ace sticks to the agreement and Pace breaks the original agreement, then Cell C represents the outcome where Pace receives a profit of $ 280 million.

B) If Pace sticks to the agreement and Ace breaks the original agreement, then Cell B represents the outcome where Ace receives a profit of $ 280 million.

C) If Pace breaks the agreement and Ace decides to stick to the original agreement, then cell C represents the outcome where Ace receives a profit of $200 million.

D) If pace decides to stick to the original agreement, and Ace breaks the agreement, then Cell B represents the outcome where Pace receives a profit of $200 million.

E) If both break the agreements then cell D represents the outcome where each company receives a profit share of $210 million each.

F) If both firms want to mutually maximize profit, they will stick to the agreement and cell A will represent the outcome where each company's profit share is $250 million.

G) Nash equilibrium in this game is represented by cell D, where both of them break the agreement.

H) Both of Pace and Ace don't maximize profit mutually and they are unaware of their opponent's choice. This is like prisoners' dilemma where the players don't cooperate and act according to their own interest. Therefore, Cell D represents Nash equilibrium, where both of them break the agreement.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

---

---

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