Exhibit 9-6 Two-Firm Payoff Matrix

Assume costs are identical for the two firms in Exhibit 9-6. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:

Question

Exhibit 9-6 Two-Firm Payoff Matrix

Assume costs are identical for the two firms in Exhibit 9-6. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:

Quizplus · Accepted Answer

The best choice for both Widget Co. and Ajax Co. is to form a cartel and agree on charging the high price. This is because the profit is maximized when both firms charge the high price, resulting in a total profit of $16 million ($8 million for Widget Co. and $8 million for Ajax Co.), which is higher than the profits earned when each firm charges a different price ($10 million each) or a low price ($6 million each). By forming a cartel, the two firms can avoid the price competition and earn higher profits. Therefore, the equilibrium price for both firms is the high price.