Microeconomics 19th Edition by Campbell McConnell,Stanley Brue,Sean Flynn

Exercise 1

Consider a "punishment" variation of the two-firm oligopoly situation shown in Figure 11.3 in the chapter (not in this appendix). Suppose that if one firm sets a low price while the other sets a high price, then the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars is taken from the low- price firm and given to the high-price firm. What is the smallest amount that the fine X can be such that both firms will want to always set the high price?