Exhibit 9-6 Two-Firm Payoff Matrix

Suppose costs are identical for the two firms in Exhibit 9-6. 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 9-6 Two-Firm Payoff Matrix

Suppose costs are identical for the two firms in Exhibit 9-6. 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

If both firms assume that their rival will respond with the same price, then it is in each firm's best interest to set the high price. If either firm deviates and sets a low price, then it will earn lower profits than if it had set the high price. Therefore, the equilibrium outcome is for both firms to charge the high price.