If you advertise and your rival advertises,you each will earn $5 million in profits.If neither of you advertises,you will each earn $10 million in profits.However,if one of you advertises and the other does not,the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million.Suppose this game is repeated for a finite number of times,but the players do not know the exact date at which the game will end.The players can earn collusive profits as a Nash equilibrium to the repeated play of the game if the probability the game terminates in any period is:
A) 1.
B) greater than 1.
C) close to zero.
D) None of the preceding answers is correct.

Question

Quizplus · Accepted Answer

In a repeated game, the players have the opportunity to punish each other if they deviate from a cooperative outcome. However, if the likelihood of the game ending is high, then there is less incentive for the players to cooperate since they may not have the opportunity to punish each other enough times. In this particular game, if the probability of the game ending in any period is very high, then each player can earn the higher payoff of $10 million by not advertising. Therefore, the best choice would be a probability that is close to zero, as this maximizes the number of periods where the players can collude and earn the higher profits of $5 million each.

If You Advertise and Your Rival Advertises,you Each Will Earn