Suppose there is a 20 percent chance that the advertising game depicted in the above payoff matrix will end next period.The collusive agreement {(Not Advertise, Not Advertise)} is A)sustainable since $175 $50.

Question

Suppose there is a 20 percent chance that the advertising game depicted in the above payoff matrix will end next period.The collusive agreement {(Not Advertise, Not Advertise)} is A)sustainable since $175 < $625. B)unsustainable since $175 < $625. C)sustainable since $10 > $50. D)unsustainable since $10 > $50.

Quizplus · Accepted Answer

The collusive agreement is the strategy profile (Not Advertise, Not Advertise), which results in each firm earning a profit of $175. If there is a 20% chance that the game will end next period, then the players discount the future profits by this probability. The discounted future profit for each player from choosing (Not Advertise, Not Advertise) is:

Player 1: $175 + 0.8($625) = $675
Player 2: $175 + 0.8($625) = $675

If either player deviates from this agreement and chooses to advertise instead, they will earn a profit of $50 (since the other player will also advertise in response), resulting in a discounted future profit of:

Player 1: $50 + 0.8($10) = $58
Player 2: $50 + 0.8($10) = $58

Since $58 < $675, neither player has an incentive to deviate from the collusive agreement. Therefore, the collusive agreement is sustainable.

Suppose There Is a 20 Percent Chance That the Advertising