Question

Use the following Payoff Matrix for Company A and Company B, the only two companies that produce widgets, to answer the following questions.

• What is the expected outcome of this one-time (not repeated) game? Defend your answer.
• How might your answer change if the game is repeated indefinitely?
• To what extent does this example illustrate why firms in some concentrated oligopolies exhibit cooperative or collusive behavior even though they don’t explicitly collude?

Company A Lowers Price	Company B’s Payoff: $100 Company A’s Payoff: $100	Company B’s Payoff: -$100 Company A’s Payoff: $1,000
Company A Does Not Lower Price	Company B’s Payoff: $1000 Company A’s Payoff: -$100	Company B’s Payoff: $500 Company A’s Payoff: $500

Describe at least two benefits to companies implementing corporate social responsibility (CSR) and shared value strategies. Include at least two examples of companies that have adopted CSR or shared value, and discuss how they benefited from them

Answer 1

Answer 1:

a. Expected outcome of this one time non-repeated game is both the companies opting for lower price. This is because keeping prices low is the Nash Equilibrium of the game. When company A keeps the prices low, the best for company B is to keep the prices low and when company B keeps the prices low, the best for company A is to keep the prices low. Thus, keeping prices low is the Nash Equilibrium of the game when the game is played once.

b. If the game is played infinite number of times, the best for both the firms is to keep the prices high or not lower price. This is because now when the game is to played infinitely, then both companies will enter into collusive agreement to cooperate with each other by not lowering price because this will give higher pay off to both the firms as compared to non-collusive agreement.

c. In the above case the firms have not colluded explicitly but in the long run when the game is played infinitely then both firms will depict a cooperative agreement because this is beneficial for both the firms as they will end up earning higher profits by cooperating with each other.