Firms will choose a Grim trigger strategy if they:
A)believe high profits are sustainable.
B)believe that the firms in the industry will compete with each other for a long time to come.
C)have little control over the market price.
D)are sure that cheating behavior will go unnoticed.

Question

Quizplus · Accepted Answer

A Grim trigger strategy involves firms punishing each other for cheating by setting a retaliation price that is unprofitable for both parties. This strategy is only effective if firms believe that they will be in the industry for a long time and will be able to sustain such high prices. Therefore, the best choice is B, as it aligns with the conditions required for a Grim trigger strategy to be successful. A is not a suitable answer, as the belief in high profits does not necessarily indicate a preference for a Grim trigger strategy. C and D are incorrect, as Grim trigger strategies are typically implemented when firms have control over market prices and are able to detect cheating behavior.

Firms Will Choose a Grim Trigger Strategy If They