Game theory shows that increases in output by one firm result in output reduction by the other. Therefore, under quantity adjustment, a hard commitment will:
A)Tend to have a positive effect on the committing firm's profitability
B)Tend to lead other firms to reduce their outputs
C)Answers a and b
D)None of the above

Question

Quizplus · Accepted Answer

A hard commitment, such as a firm committing to a certain level of output, tends to have a positive effect on the committing firm's profitability because it signals to other firms that the committing firm is committed to producing a certain quantity. This can lead other firms to reduce their output, resulting in a reduction in total output in the market. Therefore, both options a and b are correct.

Game Theory Shows That Increases in Output by One Firm