Assume that payoffs are received at the time a pricing decision is made, so the first-period payoff does not need tobe discounted. If the interest rate is 30% per period, then the present value of Bridezilla-No-More's profit fromfollowing the collusive agreement forever ismillion, whereas the present value from breaking theagreement in the first period ismillion. Therefore, Tying-the-Knot's grim trigger strategyeffectively deter Bridezilla-No-More from cheating on their agreement. 3. Understanding grim-trigger strategiesSuppose only two firms, Tying-the-Knot and Bridezilla-No-More, offer high-class wedding planning services. Thefollowing payoff matrix shows the profit (in millions of dollars) of each company, depending on whether it sets a highor low price for its services. Tying-the-Knot and Bridezilla-No-More are both profit-maximizing firms.Tying-the-KnotLowHighBridezilla-No-MoreTrueFalseLow8,83, 18The Nash equilibrium of this game is for Tying-the-Knot to set alow price.High18,312, 12Aa Aalow price and Bridezilla-No-More to set aTrue or False: Both firms would be better off if they colluded and set a high price for their services, instead of usingthe Nash equilibrium.Suppose that the firms play this game indefinitely. Both firms agree to collude in order to maintain higher profits. Todeter cheating, Tying-the-Knot announces that it will play a grim trigger strategy. Given this strategy, what willhappen if Bridezilla-No-More breaks the collusive agreement in the first period? Check all that apply.Bridezilla-No-More will play High in the second period.Tying-the-Knot will play Low in the second period and then High until Bridezilla-No-More breaks the agreementagain.XTying-the-Knot will play Low going forward.Beginning in the period after cheating has occurred, both firms will be stuck in the Nash equilibrium forever.

The game theory in economics involves two or more person competing or coordinating with each other…

Assume that payoffs are received at the time a pricing decision is made, so the first-period payoff does not need to be discounted. If the interest rate is 30% per period, then the present value of Bridezilla-No-More's profit from following the collusive agreement forever is million, whereas the present value from breaking the agreement in the first period is million. Therefore, Tying-the-Knot's grim trigger strategy effectively deter Bridezilla-No-More from cheating on their agreement.

Assume that payoffs are received at the time a pricing decision is made, so the first-period payoff does not need to be discounted. If the interest rate is 30% per period, then the present value of Bridezilla-No-More's profit from following the collusive agreement forever is million, whereas the present value from breaking the agreement in the first period is million. Therefore, Tying-the-Knot's grim trigger strategy effectively deter Bridezilla-No-More from cheating on their agreement.

Principles of Microeconomics (MindTap Course List)

8th Edition

ISBN:9781305971493

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter17: Oligopoly

Section: Chapter Questions

Problem 9PA

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