A and B are going to play a game twice. During both repetitions, if they both select a low price or a high price, their market share stays the same. But if one selects a low price while the other selects a high price, then the only with the low gets more money while the one with the high price loses some market share. Based on this information what is the most likely outcome in both periods.

Question

Quizplus · Accepted Answer

The Answer is Start with the second period. If you are A, you will select low price because that is the best you can do. Knowing this B will also select a low price. Now you know that B will select a low price in the second period and the game ends there. So in the first period you can do no better than select a low price. Knowing this, B will also select a low price. Hence in both periods both firms will select a low price.

A and B Are Going to Play a Game Twice