Pricing strategies associated with cooperative equilibrium

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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).

a. Identify the pair of pricing strategies associated with a Cooperative equilibrium.

b. Using the definition of a Cooperative equilibrium, show why this pair of pricing strategies is a Cooperative equilibrium.

Reference no: EM131388835

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