Consider a “punishment” variation of the two-firm oligopoly situation shown in Figure 14.1. Suppose that if one firm sets a low price while the other sets a high price, then the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars is taken from the low-price firm and given to the high-price firm. What is the smallest amount that the fine X can be such that both firms will want to always set the high price? FIGURE 14.1 Profit payoff (in millions) for a two-firm oligopoly. Eachfirm has two possible pricing strategies. RareAir's strategies are shown inthe top margin, and Uptown's in the left margin. Each lettered cell of thisfour-cell payoff matrix represents one combination of a RareAir strategyand an Uptown strategy and shows the profit that combination would earnfor each. Assuming no collusion, the outcome of this game is Cell D, withboth parties using low-price strategies and earning $8 million of profits.RareAir's price strategyHighLow$12B$15High$12$6$6$8Low$15$8Uptown's price strategy

In oligopoly market there are two firms. One firm sets high price and another firm sets low price…

Answered: FIGURE 14.1 Profit payoff (in millions)…

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: Oligopoly

Section: Chapter Questions

Problem 5PA

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Consider a “punishment” variation of the two-firm oligopoly situation shown in Figure 14.1. Suppose that if one firm sets a low price while the other sets a high price, then the firm setting the high price can fine the firm setting the low price. Suppose that whenever a fine is imposed, X dollars is taken from the low-price firm and given to the high-price firm. What is the smallest amount that the fine X can be such that both firms will want to always set the high price?

FIGURE 14.1 Profit payoff (in millions) for a two-firm oligopoly. Each
firm has two possible pricing strategies. RareAir's strategies are shown in
the top margin, and Uptown's in the left margin. Each lettered cell of this
four-cell payoff matrix represents one combination of a RareAir strategy
and an Uptown strategy and shows the profit that combination would earn
for each. Assuming no collusion, the outcome of this game is Cell D, with
both parties using low-price strategies and earning $8 million of profits.
RareAir's price strategy
High
Low
$12
B
$15
High
$12
$6
$6
$8
Low
$15
$8
Uptown's price strategy

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