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:

Self-Reliance

The reliance on one’s own powers and resources rather than those of others.

Social Competence

The set of skills necessary for an individual to perform successfully in social settings, including communication, empathy, and conflict resolution abilities.

Critical Period

A specific time during development in which an organism is particularly receptive to certain environmental stimuli or experiences, leading to lasting changes in its capabilities.

Preoperational Stage

A stage of development in Jean Piaget's theory, typically from ages 2 to 7, where children begin to engage in symbolic play but do not yet comprehend mental operations.