Exhibit 10-6 Two-Firm Payoff Matrix

Assume costs are identical for the two firms in Exhibit 10-6. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:

Question

Exhibit 10-6 Two-Firm Payoff Matrix

Assume costs are identical for the two firms in Exhibit 10-6. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:

Quizplus · Accepted Answer

If both firms form a cartel and agree on their prices, they would want to maximize their joint profits. In this case, the highest joint profit is achieved by charging the high price ($10) and sharing the market demand equally (50-50). If one firm charges the high price and the other charges the low price, the firm charging the low price would have a higher market share but lower profit, while the other firm charging the high price would have a lower market share but higher profit. Therefore, both firms would want to charge the high price to maximize their joint profit.