Explain how history affects ability of firms in this game

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Q. You operate in a duopoly in which you and a rival must simultaneously decide illustrate what price to advertise in weekly newspaper. If you each charge a low price, you each earn zero profits. If you each charge a high price, you each earn profits of $3. If you charge different prices, one charging higher price loses $5 and one charging lower price makes $5.

a. Find Nash equilibrium for a one-shot version of this game.

b. Now suppose game is infinitely repeated. If interest rate is 10 percent, can you do better than you could in a one-shot play of game? Explain.

c. Explain how "history" affects ability of firms in this game to achieve an outcome superior to that of one-shot version of game.

Reference no: EM1370844

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