Suppose two firms are in a game situation, and they each must decide on a strategy regarding whether to select a high price or a low price. Profits for a firm are highest when it selects a low price, while the other selects a high price; profits are lowest if one selects a high price, while the other selects a low price; profits are in between when both select low prices; and profits are slightly higher when both select high prices. In the absence of collusion we expect
A) one of the firms to select a high price and the other a low price.
B) one firm to select a high price and the other a low price in the first period, followed by a reversal in the second period.
C) both to select high prices.
D) both to select low prices.

Question

Quizplus · Accepted Answer

Given the scenario, both firms are likely to select low prices to avoid the risk of selecting a high price while the other selects a low price, which would result in the lowest profit. This outcome aligns with the Nash Equilibrium in non-cooperative games, where each player's strategy is optimal, given the strategy of the other player.

Suppose Two Firms Are in a Game Situation, and They