Considering the three-firm price-setting game scenario, what would be the resulting market dynamics if two of the firms, B and C, were to set their prices independently rather than acting in unison?

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This node outlines the payoff structure for a three-firm price-setting game, as depicted in Figure 8.21, from Firm A's perspective. It assumes that the other two firms, B and C, act identically. When all three firms set a high price, they split the market, each selling 20 units for a \$60 profit. If all three choose a low price, each sells 24 units and earns \$24. In a mixed-price scenario, the total market profit of \$72 from 72 units sold is divided among the firms that set the low price, while any high-pricing firm earns zero profit.

Parameters and Payoffs in a Three-Firm Price-Setting Game (Figure 8.21)

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

CORE Econ - The Economy 2.0: Microeconomics

The price-setting game involving three firms, as detailed in Figure 8.21, exemplifies a prisoners' dilemma. While all firms would achieve a better outcome with a cartel agreement to set high prices, the arrangement is unsustainable. The payoff matrix reveals that each firm has a dominant incentive to defect. For example, if Firms B and C maintain a high price, Firm A can boost its profit from \$60 to \$72 by lowering its price. This action would force the other firms to lower their prices as well, leading to the cartel's collapse.

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