In the Previous Chapter You Learned About Why Cartels Are

question 64

Essay

In the previous chapter you learned about why cartels are hard to maintain since cheating is a dominant strategy for all firms involved. If this table represents the payoffs for two firms operating as a cartel, are there any Nash equilibria in this coordination game? If so, how many? For these payoffs, what is the "best" equilibrium outcome for both firms? Which outcome is likely to occur in the market? Does your answer change if these firms can communicate and/or monitor each other easily? Explain. $\begin{array}{|l|l|l|}\hline & \text { Firm 1 Cheats } & \text { Firm 1 Doesn't Cheat } \\\hline \text { Firm 2 Cheats } & \text { Firm 1 earns: } & \text { Firm 1 earns: } \\\hline & \$ 4,000 & \$ 2,000 \\\hline & \text { Firm 2 earns: } & \text { Firm 2 earns: } \\\hline & \$ 4,000 & \$ 8,000 \\\hline \text { Firm 2 Doesn't Cheat } & \text { Firm 1 earns: } & \text { Firm 1 earns: } \\\hline & \$ 8,000 & \$ 6,000 \\\hline & \text { Firm } 2 \text { earns: } & \text { Firm 2 earns: } \\\hline & \$ 2,000 & \$ 6,000 \\\hline & & \\\hline\end{array}$

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Definitions:

Balance Sheet

A financial statement that displays a company's assets, liabilities, and stockholders' equity at a specific point in time.

Working Capital

The difference between a company's current assets and current liabilities, indicating its short-term financial health.

Wages and Salaries

Wages and Salaries refer to the regular compensation paid to employees for their labor or services in executing their job responsibilities.

Note Payable

A financial obligation or loan evidenced by a promissory note, which requires the borrower to pay back the amount borrowed plus interest.