Consider the cartel of Trick and Gear.The game is repeated indefinitely and each firm employs a tit-for-tat strategy.The equilibrium is
A)both firms cheat on the agreement.
B)both firms comply with the agreement.
C)Trick cheats and Gear complies with the agreement.
D)Gear cheats and Trick complies with the agreement.
E)one of the firms exits the market.

Question

Quizplus · Accepted Answer

In a tit-for-tat strategy within an indefinitely repeated game, each firm starts by cooperating (complying with the agreement) and then mimics the other firm's previous action in subsequent rounds. This strategy fosters mutual cooperation, as cheating by one firm would lead to retaliation by the other in the next round, making both firms worse off. Therefore, the equilibrium is that both firms comply with the agreement to avoid the negative consequences of cheating.

Consider the Cartel of Trick and Gear