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Analyzing Strategic Choice in a Repeated Interaction
Two companies, Innovate Inc. and TechCorp, are the only players in a market. Each must decide whether to pursue an 'Aggressive' or 'Cooperative' strategy for the upcoming quarter. The table below shows the quarterly profits (in millions) for each company based on their choices.
| TechCorp: Cooperative | TechCorp: Aggressive | |
|---|---|---|
| Innovate Inc: Cooperative | Innovate: $10, TechCorp: $10 | Innovate: $2, TechCorp: $15 |
| Innovate Inc: Aggressive | Innovate: $15, TechCorp: $2 | Innovate: $5, TechCorp: $5 |
If this interaction were to happen only once, Innovate Inc.'s best response, regardless of TechCorp's choice, is to be 'Aggressive'. However, if both companies know they will face this same decision every quarter for the foreseeable future, explain why it might be rational for Innovate Inc. to choose the 'Cooperative' strategy instead.
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