Repeated interaction without explicit communication

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Reference no: EM131388836

Consider the following game.

Two firms, 1 and 2, individually choose and simultaneously submit a bid price for a given product. They can submit either a high price or a low price. If both firms bid high, the resulting payoff for each firm is $80 million. If firm 1 bids low and firm 2 bids high, firm 1's payoff is $81 million and firm 2's payoff is $77 million. If both firms bid low, the resulting payoffs are $78 million for firm 1 and $76 million for firm 2. If firm 1 bids high and firm 2 bids low, firm 1's payoff is $77 million and firm 2's payoff is $79 million.

Note that if firm 1 bids high (H) and firm 2 bids low (L), then the corresponding pair of pricing strategies is (H, L).

Assume there is repeated interaction without explicit communication or collusion.

State clearly whether or not the cooperative outcome can be achieved and fully justify your answer.

(Hint: identify whether or not there is a credible threat).

Reference no: EM131388836

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