Suppose two small-town video stores,store A and store B,compete.The two stores collude and agree to share the market equally.If neither store cheats on the agreement,each store will make $2,500 a day in economic profits.If only one store cheats,the cheater will increase its economic profits to $4,000 and the store that abides by the agreement will incur an economic loss of $1,000.If both firms cheat,they both will earn zero economic profits.Neither store has any way of policing the actions of the other.
(A)What is the payoff matrix if the game is played just once?
(B)What is the equilibrium if the game is played only once? Explain.
(C)What do you think will happen if the game is played many times? Why?
(D)What do you think will happen if a third firm comes into the market? Will it be harder or easier to achieve cooperation among the three firms? Why?

Question

Quizplus · Accepted Answer

The Answer of Suppose two small-town video stores,store A and store B,compete.The two stores collude and agree to share the market equally.If neither store cheats on the agreement,each store will make $2,500 a day in economic profits.If only one store cheats,the cheater will increase its economic profits to $4,000 and the store that abides by the agreement will incur an economic loss of $1,000.If both firms cheat,they both will earn zero economic profits.Neither store has any way of policing the actions of the other.
(A)What is the payoff matrix if the game is played just once?
(B)What is the equilibrium if the game is played only once? Explain.
(C)What do you think will happen if the game is played many times? Why?
(D)What do you think will happen if a third firm comes into the market? Will it be harder or easier to achieve cooperation among the three firms? Why?

Suppose Two Small-Town Video Stores,store a and Store B,compete