In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices. 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

In the game shown below, firms 1 and 2 must independently decide whether to charge high or low prices.  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)

Quizplus · Accepted Answer

In a repeated game, the players have an incentive to cooperate and avoid the Nash equilibrium outcome of (0,0), as it is not a Pareto-efficient outcome. The players can achieve a higher payoff by agreeing to charge high prices in each period. The Nash equilibrium that supports this outcome is (10,10), as neither player has an incentive to deviate from it. Therefore, the best choice is D.

In the Game Shown Below, Firms 1 and 2 Must