Suppose Two Firms Are in a Game Situation, and They

question 257

Multiple Choice

Suppose two firms are in a game situation, and they each must decide on a strategy regarding whether to select a high price or a low price. Profits for a firm are highest when it selects a low price, while the other selects a high price; profits are lowest if one selects a high price, while the other selects a low price; profits are in between when both select low prices; and profits are slightly higher when both select high prices. In the absence of collusion we expect

• A) one of the firms to select a high price and the other a low price.
• B) one firm to select a high price and the other a low price in the first period, followed by a reversal in the second period.
• C) both to select high prices.
• D) both to select low prices.