(Click to select)Low-price strategyHigh-price strategy. b. Now move backward in
ID: 2494707 • Letter: #
Question
(Click to select)Low-price strategyHigh-price strategy.
b. Now move backward in time one step. Imagine that it is the start of the first game and each firm must decide what to do during the first game. Given your answer to a, is the publicly stated policy credible? (Hint: No matter what happens in the first game, what will both firms do in the second game?)
(Click to select)NoYes.
c. Given your answers to a and b, what strategy will each firm choose in the first game?
(Click to select)High-price strategyLow-price strategy.
Explanation / Answer
a) The firms will chose low price strategy.
Even if the firms keep the promise in first attempt, each firm will have an advantage getting the output of 15 in chosing the low price strategy, so both the firms will chose the low price strategy.
b) No, such a policy is not credible, as firms will not keep up to the promise, no matter what happens in first game.
c) Given such a situation both the firms will chose low price strategy in first go as well.
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