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9 years ago
There are two firms in the residential paint industry, Cool Shades (C) and Warm Hues (W). They collude to share the market equally. They jointly set a monopoly price and split the quantity demanded at that price. Here are their options:

   i.   They continue to collude (no cheating) and make $12 million each in profits.
   ii.   One firm cheats and the other does not. The firm that cheats makes a profit
   of $14 million whereas the firm that doesn't makes a profit of $9 million.
   iii.   They both cheat and each firm makes a profit of $7 million.

a.   Construct a payoff matrix for these two firms.
b.   How does this situation relate to the prisoner's dilemma?
c.   If each firm acted noncooperatively, how much profit would each make?
d.   Are the firms better off colluding (with no cheating) or competing? Explain.
Textbook 
Essentials of Economics

Essentials of Economics


Edition: 4th
Authors:
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Chimelo46Chimelo46
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9 years ago
Glad to help you, and good luck with your course.
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