Exhibit 9-5 Two-Firm Payoff Matrix Suppose costs are identical for the two firms in Exhibit 9-5. 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 9-5  Two-Firm Payoff Matrix  Suppose costs are identical for the two firms in Exhibit 9-5. 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

In a "tit-for-tat" scenario, both firms assume that if one sets a high price, the other will do the same. Therefore, neither firm has an incentive to set a low price. Both firms have an equal incentive to set a high price, which leads to a Nash equilibrium in which both firms charge the high price. Therefore, choice B is the best choice.

Exhibit 9-5 Two-Firm Payoff Matrix Suppose Costs Are Identical for the Two