Table 17-7
Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies.

-Refer to Table 17-7. The more frequently this game is played, the more likely it is that
A)both firms will produce a good quality product.
B)both firms will produce a poor quality product.
C)both firms experience a reduction in profits compared to the Nash equilibrium outcome.
D)one firm will experience an increase in profits and the other will experience a decrease in profits.

Question

Table 17-7
Two companies, Wonka and Gekko, each decide whether to produce a good quality product or a poor quality product. In the figure, the dollar amounts are payoffs and they represent annual profits (in millions of dollars) for the two companies.
 
-Refer to Table 17-7. The more frequently this game is played, the more likely it is that
A)both firms will produce a good quality product. 
B)both firms will produce a poor quality product. 
C)both firms experience a reduction in profits compared to the Nash equilibrium outcome. 
D)one firm will experience an increase in profits and the other will experience a decrease in profits.

Quizplus · Accepted Answer

In repeated games, firms may settle into a Nash equilibrium where they both produce a poor quality product to avoid the risk of being undercut by the other, leading to a stable but suboptimal outcome for both.

Table 17-7 Two Companies, Wonka and Gekko, Each Decide Whether to Produce