Exhibit 9-5 Two-Firm Payoff Matrix

-Suppose costs are identical for the two firms in Exhibit 9-5.Each firm assumes without formal agreement that if it sets the high price its rival will not charge a lower price.Under these "tit-for-tat" conditions,equilibrium will be established by:

Question

Exhibit 9-5 Two-Firm Payoff Matrix
 
-Suppose costs are identical for the two firms in Exhibit 9-5.Each firm assumes without formal agreement that if it sets the high price its rival will not charge a lower price.Under these "tit-for-tat" conditions,equilibrium will be established by:

Quizplus · Accepted Answer

Under tit-for-tat conditions, both firms will prefer to charge the high price, as this results in a higher profit for each firm. If one firm were to charge the low price, they would earn a lower profit than if they charged the high price. Therefore, the equilibrium is for both firms to charge the high price, resulting in a payoff of $10 million for each firm. Choice A is not an equilibrium as Widget Co. could earn a higher profit by charging the high price. Choice C is not an equilibrium because Ajax Co. could earn a higher profit by charging the high price. Choice D is not an equilibrium because Widget Co. could earn a higher profit by charging the high price.