Suggested Answer to HW7-1(a)

Suggested Answer to HW7-1(a)
1. (b) If the game is repeated, the firms might be able to evolve a cooperative approach and charge the high price, each earning profits of 5 million. The more conducive industrial conditions are to collusion (few firms, similar cost structures, economic stability, high barriers to entry, lax anti-trust enforcement, etc.) the more likely this outcome will be.

Notice however that total industry profits are even higher if one charges the high price and another charges the low price. Though more difficult to maintain, the firms might even be able to evolve a strategy in which they take turns being the high or low price firm.