Walmart and Target are the only stores in a remote town that currently stock and sell the PlayStation 5 video game console.Managers at both stores are simultaneously deciding whether to charge a price of $1,000 or $1,500 for each console.If both stores charge $1,000,they earn a profit of $100,000 each.If both stores charge $1,500,they earn a profit of $200,000 each.If one store charges $1,000 and the other store charges $1,500,the store that charges $1,000 earns a profit of $250,000 and the firm that charges $1,500 earns a profit of $50,000.If Walmart and Target ________,they can both charge $1,500 and earn the highest combined profit available.
A) collude with each other
B) privately undercut each other after making an agreement
C) engage in spirited price competition
D) compete with each other only with regard to quantity and not price
E) compete with each other only with regard to price and not quantity

Question

Quizplus · Accepted Answer

Colluding with each other and both charging $1,500 would result in the highest combined profit available. If they engage in spirited price competition or undercut each other after making an agreement, they would end up with lower profits or possible losses. Competing only with regard to quantity or price would not yield the highest combined profit available.

Walmart and Target Are the Only Stores in a Remote