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Analyzing a Strategy in a Repeated Interaction
Consider a scenario where two firms interact repeatedly over many periods, each deciding whether to set a 'High Price' or a 'Low Price'. If both set a High Price, they both earn a moderate profit. If both set a Low Price, they both earn a low profit. If one sets a Low Price while the other sets a High Price, the low-pricing firm earns a very high profit, and the high-pricing firm earns a very low profit. Firm A adopts the following strategy: It begins by setting a High Price. In all subsequent periods, it will set the same price that Firm B chose in the immediately preceding period.
Analyze the effectiveness of Firm A's strategy. In your answer, break down how this strategy uses past actions to influence Firm B's future choices and why this can lead to a mutually beneficial outcome over time.
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Analyzing a Strategy in a Repeated Interaction
Two competing firms, Firm A and Firm B, sell an identical product and must decide each month whether to set a high price or a low price. If both set a high price, they each earn $10,000. If both set a low price, they each earn $3,000. If one sets a high price and the other a low price, the low-price firm earns $15,000 and the high-price firm earns only $1,000. The firms know they will be competing for the foreseeable future. After several months of both firms setting a high price, Firm B unexpectedly sets a low price for one month, earning $15,000 while Firm A earns $1,000. In the following month, Firm A decides to set a high price again. Which of the following statements best analyzes Firm A's decision?
Analyzing Strategic Choice in a Repeated Interaction
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