Exhibit 10-5 Two-Firm Payoff Matrix
-Suppose costs are identical for the two firms in Exhibit 10-5. Each firm assumes without formal agreement that if it sets the high price its rival will not charge a lower price. Under these "tit-for-tat" conditions, equilibrium will be established by:

Question

Exhibit 10-5 Two-Firm Payoff Matrix 
-Suppose costs are identical for the two firms in Exhibit 10-5. Each firm assumes without formal agreement that if it sets the high price its rival will not charge a lower price. Under these "tit-for-tat" conditions, equilibrium will be established by:

Quizplus · Accepted Answer

Under "tit-for-tat" conditions, each firm believes that if it sets a high price, its rival will not charge a lower price. Therefore, both firms will set the high price of $1,000.