Table 14-8

Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy.Each can choose either a high price or a low price.Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts.
-Refer to Table 14-8.If the two firms collude, is there an incentive for either to cheat on the collusion agreement?

Question

Table 14-8
  
Two rival oligopolists in the athletic supplements industry, the Power Fuel Company and the Brawny Juice Company, have to decide on their pricing strategy.Each can choose either a high price or a low price.Table 14-8 shows the payoff matrix with the profits that each firm can expect to earn depending on the pricing strategy it adopts.
-Refer to Table 14-8.If the two firms collude, is there an incentive for either to cheat on the collusion agreement?

Quizplus · Accepted Answer

If the two firms collude and both choose a high price, they will each earn a profit of $5 million. However, if one firm chooses a low price while the other sticks with a high price, the firm that chooses the low price will earn a profit of $10 million while the other will earn only $1 million. Therefore, there is an incentive for either firm to cheat and choose a low price, thus earning a higher profit. This is why either firm can gain if it cheats.

Table 14-8 Two Rival Oligopolists in the Athletic Supplements Industry, the Power