Microeconomics 18th Edition by Campbell McConnell, Stanley Brue, Sean Flynn

Exercise 18

Refer to the payoff matrix in question 8 at the end of this chapter. First, assume this is a one-time game. Explain how the $60/$57 outcome might be achieved through a credible threat. Next, assume this is a repeated game (rather than a one-time game) and that the interaction between the two fi rms occurs indefi nitely. Why might collusion with a credible threat not be necessary to achieve the $60/$57 outcome
Reference question 8
Explain the general meaning of the following profit payoff matrix for oligopolists C and D. All profit fi gures are in thousands.
a. Use the payoff matrix to explain the mutual interdependence that characterizes oligopolistic industries.
b. Assuming no collusion between C and D, what is the likely pricing outcome
c. In view of your answer to 8 b , explain why price collusion is mutually profitable. Why might there be a temptation to cheat on the collusive agreement