Exhibit 9-6 Two-Firm Payoff Matrix

-Assume costs are identical for the two firms in Exhibit 9-6.If both firms were allowed to form a cartel and agree on their prices,equilibrium would be established by:

Question

Exhibit 9-6 Two-Firm Payoff Matrix
 
-Assume costs are identical for the two firms in Exhibit 9-6.If both firms were allowed to form a cartel and agree on their prices,equilibrium would be established by:

Quizplus · Accepted Answer

If both firms form a cartel and agree to charge the high price, they would each earn a profit of $50 million. This is the mutually beneficial equilibrium that maximizes their joint profits. If either firm deviates from this agreement and lowers its price, the other firm would be able to capture the entire market and earn a higher profit. Therefore, Camel and Marlboro have a dominant strategy to charge the high price and establish a cartel.