Hello, Thank you in advance!! :) Suppose there are two identical firms in an ind

Question

Hello,

Thank you in advance!! :)

Suppose there are two identical firms in an industry, Filing and Firm B. These firms can "collude" into a cartel and behave like a monopolist by offering a smaller combined output and charging a high-price, and then split the market and the cartel profit equally. However, each firm can also choose to "cheat" by producing a larger output than that under the cartel agreement. Of course, with a larger output in the market, the price must fall to a lower level. The payoff matrix below states the profit (pi) for each firm as they adopt different strategies ("Cartel" or "Cheating"). Analyze the payoff matrix according to lecture discussion (do not describe what profits in each cell mean) to determine whether the cartel is stable or not.

Explanation / Answer

In the given case, Firm A best payoff when its opts cartel strategy is $30, when it opts cheating strategy is $35

Firm B best payoff when it opts cartel strategy is $30, when it opts cheating strategy is $35

The two firms would be in nash equilibrium when both their best payoffs are common, which happens at (30,30). and when both firms opt for cartel strategy

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