The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. For Bagels'R'Us, ______ is a ______.

Question

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement.  For Bagels'R'Us, ______ is a ______.

Quizplus · Accepted Answer

If BagelWorld abides by the agreement, BRU's best response would be to cheat, which would result in a profit of $10 (as opposed to $8 if they abide by the agreement). Similarly, if BagelWorld cheats, BRU's best response would be to cheat, which would result in a profit of $12 (as opposed to $6 if they abide by the agreement). Therefore, cheating is a dominant strategy for BRU regardless of what BagelWorld does. BagelWorld also has a dominant strategy of cheating, so the likely outcome is that both firms will cheat and end up with profits of $7 each.

The Market for Bagels Contains Two Firms: BagelWorld (BW) and Bagels'R'Us