Exhibit 10-6 Two-Firm Payoff Matrix
-Suppose costs are identical for the two firms in Exhibit 10-6. 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 10-6 Two-Firm Payoff Matrix 
-Suppose costs are identical for the two firms in Exhibit 10-6. 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, both firms will have an incentive to charge the high price, as setting a low price would only result in both firms earning lower profits. However, if both firms charge the high price, they will both earn a lower profit compared to if they both charged the low price. Therefore, the equilibrium will be established with Widget Co. charging the high price and Ajax Co. charging the high price.