Two restaurants, in a small town, compete in the market for pizza. Each restaurant must decide whether to charge a high price or a low price. The potential monthly profits for these firms are shown below (in thousands of dollars).
FIGURE 10-4

-Referring to Figure 10-4, what is the cooperative outcome?

Question

Two restaurants, in a small town, compete in the market for pizza. Each restaurant must decide whether to charge a high price or a low price. The potential monthly profits for these firms are shown below (in thousands of dollars).
FIGURE 10-4
 
-Referring to Figure 10-4, what is the cooperative outcome?

Quizplus · Accepted Answer

The cooperative outcome is when both restaurants charge a high price, resulting in a total profit of $130,000. This is the best choice for both restaurants because if either one charges a low price while the other charges a high price, the one charging the low price will earn less profit ($40,000 or $60,000) than if both charged a high price. If both charge a low price, they will earn a total profit of $80,000, which is still less than the total profit of $130,000 earned when both charge a high price. Therefore, both restaurants have an incentive to cooperate and charge a high price.

Two Restaurants, in a Small Town, Compete in the Market