Reference no: EM13155692

You and another firm are the only producers of plastic bags. You are firm 1 and the other firm is firm 2. You are thinking about what price to charge next period, and have the following information. i. You have 2 choicesà ¢Ã¢â€š ¬Ã¢â‚¬charge a high or a low price. So does firm 2. ii. If you both charge a high price, you split the market and each earns a profit of $10 next period. iii. If both charge a low price, you split the market again, but profit to each is $4. iv. If one firm charges a high price while the other charges a low price, the high price firm earns $-1 while the low priced firm earns $25. This is because the high priced firm will lose most of the market. Use the above information to answer the following questions. (a) Draw the payoff matrix representing this one-time strategic interaction. (b) Does your firm have a dominant strategy? Does firm 2? If so, indicate what this strategy is for each. (c) Given b., find the Nash Equilibrium outcome (actions, payoffs) for the one-time interaction. (d) Is the Nash Equilibrium the best outcome for both, i.e. is there an incentive for both firms to cooperate instead? Show me this incentive (profit difference). (e) What might prevent this cooperative outcome? Hint: think about conditions that support cooperation. (f) Bonus 1 point: (Thinking outside the box, not covered in class!) If these firms were to merge, what would be the likely outcome? Explain briefly.