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Analyzing Firm Incentives in Duopoly Markets
Consider two different market scenarios, each with two firms (Firm A and Firm B) that sell an identical product and must choose between a 'High Price' and a 'Low Price'. The firms' profits for each outcome are shown in the payoff matrices below (Firm A's profit is listed first).
Scenario 1:
| Firm B: High Price | Firm B: Low Price | |
|---|---|---|
| Firm A: High Price | ($100, $100) | ($0, $150) |
| Firm A: Low Price | ($150, $0) | ($50, $50) |
Scenario 2:
| Firm B: High Price | Firm B: Low Price | |
|---|---|---|
| Firm A: High Price | ($100, $100) | ($0, $0) |
| Firm A: Low Price | ($0, $0) | ($50, $50) |
In which scenario is a cooperative agreement to set a 'High Price' more likely to be stable without formal enforcement? Explain your reasoning by analyzing the incentives for a single firm to change its price, assuming the other firm sticks to the 'High Price' agreement.
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