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. In the Nash equilibrium of this game:

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.  In the Nash equilibrium of this game:

Quizplus · Accepted Answer

In a Nash equilibrium, each player is doing the best they can given the choice of the other player. If BagelWorld abides by the agreement, Bagels'R'Us should cheat to gain a higher profit. If Bagels'R'Us abides by the agreement, BagelWorld should cheat to gain a higher profit. Thus, both firms have an incentive to cheat and both will choose to do so, resulting in a Nash equilibrium where both cheat on the agreement.

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