The market for bagels in Charlottetown,PEI contains two firms: BagelWorld (BW)and Bagels'R'Us (BRU).The owners of the two firms decide to fix the price of bagels.The table shows the total revenue the firms will collect if they abide by the price-setting agreement or if they cheat on the agreement.
-Refer to the payoff matrix above.Suppose a new element was introduced into the agreement: if one firm cheats today,the other firm will cheat tomorrow but if both abide today,both will abide tomorrow.The likely effect would be to
A) increase the probability that both firms would cheat.
B) increase the probability that Bagel World would cheat.
C) increase the probability that both firms would abide.
D) increase the probability that Bagels 'R' Us would cheat.
E) change nothing about the game.

Question

The market for bagels in Charlottetown,PEI contains two firms: BagelWorld (BW)and Bagels'R'Us (BRU).The owners of the two firms decide to fix the price of bagels.The table shows the total revenue the firms will collect if they abide by the price-setting agreement or if they cheat on the agreement. 
-Refer to the payoff matrix above.Suppose a new element was introduced into the agreement: if one firm cheats today,the other firm will cheat tomorrow but if both abide today,both will abide tomorrow.The likely effect would be to
A) increase the probability that both firms would cheat. 
B) increase the probability that Bagel World would cheat. 
C) increase the probability that both firms would abide. 
D) increase the probability that Bagels 'R' Us would cheat. 
E) change nothing about the game.

Quizplus · Accepted Answer

Introducing the element of future consequences for cheating creates a stronger incentive for both firms to abide by the price-setting agreement. If one firm cheats today, the other firm will retaliate and cheat tomorrow, leading to lower total revenue for both firms in the long run. Therefore, both firms have a higher likelihood of abiding by the agreement to avoid the negative consequences in the future.

The Market for Bagels in Charlottetown,PEI Contains Two Firms: BagelWorld