Question

Consider the following information for a simultaneous move one-shot game: If you and your rival each charge a low price, you each will earn $5 million in profits. You will each earn $10 million in profits if you each charge a high price. However, if one of you charges a low price and the other charges a high price, the firm that charges a low price will earn $15 million and the firm that charges a high price will earn $1 million. The cooperative equilibrium is:

Select one:

a. for each firm to charge the low price.

b. for each firm to charge the high price.

c. for you to charge the low price and your rival to charge the high price.

d. for you to charge the high price and your rival to charge the low price.

Answer 1

b.for each firm to charge the high price.

This is the cooperative equillibirum or cartel, where both firms cooperate to earn higher profits together, rather than competing with each other and earning lower profits .

However the cooperative equillibrium does not last long in most of the cases as one firm desires to cheat the other to increase its own profit thus breaking the cooperation.