You Operate in a Duopoly in Which You and a Rival

question 136

Essay

You operate in a duopoly in which you and a rival must simultaneously decide what price to advertise in the weekly newspaper. If you each charge a low price, you each earn zero profits. If you each charge a high price, you each earn profits of $3. If you charge different prices, the one charging the higher price loses $5 and the one charging the lower price makes $5.
a. Find the Nash equilibrium for a one-shot version of this game.
b. Now suppose the game is infinitely repeated. If the interest rate is 10 percent, can you do better than you could in a one-shot play of the game? Explain.
c. Explain how "history" affects the ability of firms in this game to achieve an outcome superior to that of the one-shot version of the game.

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Definitions:

Objective

A goal or target that is aimed to be achieved, particularly in research, projects, or personal development, often specific and measurable.

External Evaluator

An external evaluator is an independent party, not directly involved in a project or program, who assesses the performance, outcomes, or impact, providing unbiased, objective evaluations.

Outside Company

A firm or business that is external or not directly connected to one's own organization.

Equity Method

An accounting technique used by companies to assess the profits earned by their investments in other companies, where the investment is recorded at original cost and adjusted for the investor's share of the investee's profit or loss.