Question

While cartels are illegal, companies often have big incentives to form a cartel and raise prices. To understand these incentives, let’s analyse a game between two competing companies. Suppose that each company can either set a price of $100 or $200 for its product. If one company charges $100, it earns low profits if the other company charges $100 also, and high profits if the other company charges $200. On the other hand, if the company charges $200, it earns very low profits if the other company charges $100, and medium profits if the other company charges $200 also.

1. Draw the decision box for this game.

2. What is the Nash equilibrium in this game? Explain.

3. Is there an outcome that would be better than the Nash equilibrium for both companies? How could it be achieved? Who would lose if it were achieved?

Answer 1