Suggested Answer to HW7-2(b)

Suggested Answer to HW7-2(b)2. (b) In the repeated game we look for a collusive outcome that could evolve. If those factors that facilitate collusion are present, such outcomes are more likely. Certainly Firm 2 would like Firm 1 to charge the high price so that it can charge the low price. If that were to occur, industry profits would be maximized. If collusion is easy enough Firm 2 might try and offer to pay Firm 1 to charge the high price. Such an outcome is difficult in that it is not only illegal, but it's easier to trace than a verbal agreement.