Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits.If neither of you advertise, you will each earn $10 million in profits.However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non advertising firm will earn $1 million.If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever) then a Nash equilibrium when the interest rate is zero is
A)for each firm to not advertise until the rival does, and then to advertise forever.
B)for your firm to never advertise.
C)for your firm to always advertise when your rival does.
D)for each firm to advertise until the rival does not advertise, and then not advertise forever.

Question

Quizplus · Accepted Answer

In a repeated game like this, the players have the opportunity to punish each other for not cooperating in the previous round. In other words, if one firm advertises and the other does not, the non-advertising firm earns only $1 million, which is a strong disincentive to not advertise in the next round. Therefore, the best strategy is to wait for the rival to advertise and then to advertise forever, creating a "tit-for-tat" strategy that encourages cooperation and maximizes profits in the long run. This is known as a "trigger strategy" and is a common solution to repeated games of this type.

Consider the Following Information for a Simultaneous Move Game: If