The principle of backward induction proves that in price-fixing oligopoly games:
A)the players honor the agreement if the game is repeated.
B)the players honor the agreement if the game is played five times.
C)the players dishonor the agreement if the game is not played more than twice.
D)the players dishonor the agreement if the game is repeated a number of times, as determined prior to the start of play.

Question

Quizplus · Accepted Answer

Backward induction, a concept in game theory, suggests that in a finitely repeated game (where players know when the game will end), cooperation (such as honoring a price-fixing agreement in an oligopoly) breaks down as the end approaches. Players have an incentive to cheat in the final rounds to gain a short-term advantage, knowing the game will end, which leads to a breakdown in cooperation from the start.

The Principle of Backward Induction Proves That in Price-Fixing Oligopoly