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.Suppose this game is repeated for a finite number of times, but the players do not know the exact date at which the game will end.The players can earn collusive profits as a Nash equilibrium to the repeated play of the game if the probability the game terminates in any period is
A)1.
B)greater than one.
C)close to zero.
D)none of the statements associated with this question are correct.

Question

Quizplus · Accepted Answer

In order for the players to earn collusive profits, they need to cooperate and not advertise, resulting in each earning $10 million in profits. However, if one player deviates and advertises while the other player does not, the advertising player earns $15 million while the non-advertising player earns only $1 million, creating a large incentive to defect. Therefore, the players are unlikely to maintain cooperation for a large number of repetitions of the game as the temptation to defect is high. As a result, the game is likely to terminate early, reducing the probability of reaching a Nash equilibrium. Thus, the probability the game terminates in any period is close to zero.

If You Advertise and Your Rival Advertises, You Each Will