In the game shown below,firms 1 and 2 must independently decide whether to charge high or low prices. $\begin{array}{l}
\quad\quad\quad\quad\quad\text { Firm Two }\
\text { Firm One }
\begin{array}{|l|l|l|}
\hline & \text { High Price } & \text { Low Price } \
\hline \text { High Price } & (10,10) & (5,-5) \
\hline \text { Low Price } & (5,-5) & (0,0) \
\hline
\end{array}\end{array}$ Which of the following are the Nash equilibrium payoffs (each period)if the game is repeated 10 times?
A) (0, 0)
B) (5, -5)
C) (-5, 5)
D) (10, 10)

Question

Quizplus · Accepted Answer

In a repeated game, the Nash equilibrium can be defined as a strategy profile that is a Nash equilibrium in every subgame of the repeated game, including the last period. In this game, the only Nash equilibrium is for both firms to choose the high price in every period, resulting in a payoff of (10,10) in every period. This strategy profile is a Nash equilibrium because neither firm has an incentive to deviate to the low price in any period, as doing so would result in a lower payoff in that period and may cause the other firm to retaliate with a low price in future periods, leading to even lower payoffs in the long run. Therefore, the Nash equilibrium payoff in every period is (10,10).

In the Game Shown Below,firms 1 and 2 Must Independently