Reference no: EM131467169

 Russia and South Africa are the 2 primary firms in the DeBeer's Diamond Cartel. If both countries can collude, the total market output and price will be the same is if were a monopoly. However, if a country cheats, the output will be greater and the price will be lower than the monopoly outcome. The payoff matrix for this year's production is:

                                                                           South Africa

                                                           Collude                      Cheat

                       Collude                      $125 , ($175)             $75, ($300)

Russia

                       Cheat                          $200, ($25)                 $100, ($150)

where payoffs, in millions, are to Russia, (South Africa).

a) Outline and explain the best course of action for firm 2 for each course of action that may be undertaken by firm 1. 

b) What is the outcome if this game is only played once? Fully explain your answer.

c) If the game can be played many times, describe how a grim-reaper strategy employed by Russia could achieve the Collude, Collude outcome. Explain why your strategy will work.

d) Will cooperation always emerge as an outcome, with a grim-reaper strategy? Explain.