In the game shown below,firms 1 and 2 must independently decide whether to charge high or low prices. $\begin{array}{l}
\quad\quad\quad\quad\quad\text { Firm Two }\
\text { Firm One }
\begin{array}{|l|l|l|}
\hline & \text { High Price } & \text { Low Price } \
\hline \text { High Price } & (10,10) & (5,-5) \
\hline \text { Low Price } & (5,-5) & (0,0) \
\hline
\end{array}\end{array}$ Suppose the game is infinitely repeated.Then the "best" the firms could do in a Nash equilibrium is to earn ___ per period.
A) (0, 0)
B) (5, -5)
C) (-5, 5)
D) (10, 10)

Question

Quizplus · Accepted Answer

In an infinitely repeated game, firms can sustain cooperation to avoid the temptation of undercutting each other. By both charging high prices, they can achieve the (10, 10) outcome each period, which is the best they can do while maintaining a Nash equilibrium. This relies on the threat of reverting to a less favorable outcome if one cheats, ensuring mutual best response.

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