Now let Alcoa and Kaiser repeat their pricing decision on the first day of every

Question

Now let Alcoa and Kaiser repeat their pricing decision on the first day of every month. Suppose they have been cooperating for the past few months, but now the manager at Kaiser is trying to decide whether to cheat or to continue cooperating. Kaiser’s manager believes Kaiser can get away with cheating for two months, but he also believes that Kaiser would be punished for the next two months after cheating. After punishment, Kaiser’s manager expects the two firms would return to cooperation. Kaiser’s manager ignores the time-value of money and does not discount future benefits or costs. ·

What is the monthly gain to Kaiser from cheating? What is the present value of the benefit from cheating for the two months of cheating? ·

What is the monthly cost of punishment to Kaiser? What is the pres­ent value of the cost of cheating for the two months of punishment? ·

Will Kaiser cooperate or cheat? Explain.

Explanation / Answer

A) 40% is the monthly gain to kaiser from cheating.

B) $150,00 is the monthly cost of punishment to kaiser.

C) Kaiser will cheat.  

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