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Suppose there are two firms in the market. If they cooperate, they can make $400 each...

Suppose there are two firms in the market. If they cooperate, they can make $400 each per year in economic profit. If they both compete, they make $200 per year. If one competes and one tries to cooperate, the “competer” makes $800 and the cooperator makes $50. The yearly interest rate is r.

Suppose firm 1 plays a “trigger strategy” of cooperating until it observes the other firm competing, and then competing ever afterwards. In this case, for what values r would firm 2 prefer playing a trigger strategy to competing in every period?

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PAGE NO. PAGE NOT Date : 7 726 -- Date : 120 a com > Somogen -- cosperate compete Cooper 10040 50,800 combete (80050 (20012008 Grim (trigger) Shogy) 0 Start with cooperation in period I (cookeration, Cooperations) @ Continues with looperation it cooperation T has observed in previous period 13 If no bunish the cheater by non - Cocherating forever Puy-est Stream - 4007200 - to peeneri from cooperation forever = 400 (at ft d...) 400 % 50+20001 350 x 2000 pay-off-stream toplayer1 = 50+ zoodtzood? Tit he cheats in perioda Sot 20 fit 8+d2_ - Cot 2000 1- dc 1:75)

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