Figure 13-4

The above matrix (Figure 13-4)displays the possible profit results of two firms, A and B, from following two different possible strategies: charging a high price and charging a low price. In each cell, the first number is the profit of firm A, and the second number is the profit of firm B.
a. Assume that collusion is not possible. Determine the optimal strategy for each firm. Explain why it is the best strategy to follow.
b. Based on your answer to a., explain why firms collude. What are the pitfalls of collusion?

Question

Figure 13-4 
  
  
​ 
    
The above matrix (Figure 13-4)displays the possible profit results of two firms, A and B, from following two different possible strategies: charging a high price and charging a low price. In each cell, the first number is the profit of firm A, and the second number is the profit of firm B. 
a. Assume that collusion is not possible. Determine the optimal strategy for each firm. Explain why it is the best strategy to follow. 
b. Based on your answer to a., explain why firms collude. What are the pitfalls of collusion?

Quizplus · Accepted Answer

The Answer of Figure 13-4 
  
  
​ 
    
The above matrix (Figure 13-4)displays the possible profit results of two firms, A and B, from following two different possible strategies: charging a high price and charging a low price. In each cell, the first number is the profit of firm A, and the second number is the profit of firm B. 
a. Assume that collusion is not possible. Determine the optimal strategy for each firm. Explain why it is the best strategy to follow. 
b. Based on your answer to a., explain why firms collude. What are the pitfalls of collusion?

Figure 13-4 ​

Figure 13-4