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Even though they're separated, Paul and Camille decide to study a price-fixing agreement that will mutually benefit them. The idea is that they both agree to a price higher than the Bertrand equilibrium price, using the Grim Trigger strategy (if they detect a deviation from the agreed-upon price, they switch to playing the static Bertrand prices forever). What is the weakest assumption on the discount factor & e (0, 1) that supports the existence of a SPNE with collusion in this market (that is, a SPNE with a price strictly higher than the Bertrand equilibrium price from the previous question)?

Even though they're separated, Paul and Camille decide to study a price-fixing agreement that will mutually benefit them. The idea is that they both agree to a price higher than the Bertrand equilibrium price, using the Grim Trigger strategy (if they detect a deviation from the agreed-upon price, they switch to playing the static Bertrand prices forever). What is the weakest assumption on the discount factor & e (0, 1) that supports the existence of a SPNE with collusion in this market (that is, a SPNE with a price strictly higher than the Bertrand equilibrium price from the previous question)?

Economics: Private and Public Choice (MindTap Course List)
Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter24: Price-searcher Markets With High Entry Barriers
Section: Chapter Questions
Problem 9CQ
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Even though they're separated, Paul and Camille decide to study a price-fixing agreement that will mutually benefit them. The idea is that they both agree to a price higher than the Bertrand equilibrium price, using the Grim Trigger strategy (if they detect a deviation from the agreed-upon price, they switch to playing the static Bertrand prices forever). What is the weakest assumption on the discount factor d e (0, 1) that supports the existence of a SPNE with collusion in this market (that is, a SPNE with a price strictly higher than the Bertrand equilibrium price from the previous question)? Collusion CANNOT be supported with any d e (0, 1) 6 2 9/17 8 2 1/2 Collusion can be supported with any & e (0, 1) O 823 - 1
Transcribed Image Text:Even though they're separated, Paul and Camille decide to study a price-fixing agreement that will mutually benefit them. The idea is that they both agree to a price higher than the Bertrand equilibrium price, using the Grim Trigger strategy (if they detect a deviation from the agreed-upon price, they switch to playing the static Bertrand prices forever). What is the weakest assumption on the discount factor d e (0, 1) that supports the existence of a SPNE with collusion in this market (that is, a SPNE with a price strictly higher than the Bertrand equilibrium price from the previous question)? Collusion CANNOT be supported with any d e (0, 1) 6 2 9/17 8 2 1/2 Collusion can be supported with any & e (0, 1) O 823 - 1
Part 2: First Long Question There are two French bakeries in a small town: Le Meilleur Croissant (C), owned by Camille, and Le Meilleur Pain Au Chocolat (P), owned by Paul. In each period of an infinitely repeated game, they compete a la Bertrand, with market demand given by Q(pmin) = 10 - Pmin- Even though they sell identical goods, they have different marginal costs: cc = 2 and Cp = 4 (Paul bakes just as well but is bad at business decisions). There are no fixed costs.
Transcribed Image Text:Part 2: First Long Question There are two French bakeries in a small town: Le Meilleur Croissant (C), owned by Camille, and Le Meilleur Pain Au Chocolat (P), owned by Paul. In each period of an infinitely repeated game, they compete a la Bertrand, with market demand given by Q(pmin) = 10 - Pmin- Even though they sell identical goods, they have different marginal costs: cc = 2 and Cp = 4 (Paul bakes just as well but is bad at business decisions). There are no fixed costs.
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