Use the following to answer question
Consider the following information for a simultaneous move game: If you charge a low price (LP)and your rival charges a LP,you each earn $5 million in profits. If both charge a high price (HP),each will each earn $10 million in profits. However,if one charge a LP and the other does not,the firm that charges a LP will earn $15 million and the other firm will earn $1 million.
-If the game continues for infinity,then the new Nash Equilibrium is
A)for one firm to charge a HP forever.
B)for your firm charge a LP when the other firm does.
C)for each firm to charge HP so long as the rival does,otherwise charge a LP.
D)for each firm to charge LP until the rival does,and then to charge a HP forever.

Question

​Use the following to answer question
Consider the following information for a simultaneous move game:  If you charge a low price (LP)and your rival charges a LP,you each earn $5 million in profits.  If both charge a high price (HP),each will each earn $10 million in profits.  However,if one charge a LP and the other does not,the firm that charges a LP will earn $15 million and the other firm will earn $1 million.
-​If the game continues for infinity,then the new Nash Equilibrium is
A)​for one firm to charge a HP forever.
B)for your firm charge a LP when the other firm does.
C)for each firm to charge HP so long as the rival does,otherwise charge a LP.
D)​for each firm to charge LP until the rival does,and then to charge a HP forever.

Quizplus · Accepted Answer

In an infinitely repeated game, the best strategy is to maintain cooperation (in this case, both firms charging HP) as long as the other player does. If the other player deviates and charges LP, then the best response is to punish by also charging LP. This creates a cycle of cooperation and punishment, which can sustain the HP outcome in the long run. Therefore, in this game, each firm should charge HP so long as the rival does, otherwise charge LP.

​Use the Following to Answer Question

Use the Following to Answer Question