Question

1. Let's make a deal. Now suppose the two firms could agree to share technology secrets and split the monopoly profits. If they both cooperate, they each earn 2, and if they both defect, they each earn 1 (payoffs are in billions of dollars). However, if one firm cooperates, the other can defect and earn 3, while the other earns 0. (a) Write down this prisoner's dilemma with a payoff matrix. (b) If the firms interact just once (1.e. the game is one-shot), what is the Nash Equilibrium? (d) What if firms can communicate and make an agreement? Will this change the outcome of a one-shot game? (e) Suppose each firm has an army of lawyers that cost a and threaten to file a lawsuit with value p if the other reneges. Derive the minimum aº such that the threat inimum a' such that the threat of punishment is credible and then derive the minimum punishment f'.

Answer 1

Deviate Foin 2 Cooperate cooperate (2, 2) Deviate (3,00 Refect) Toim (0,3). (12) b and will Best response are underlined .. (Defect, Defect) is a Nash eam be the outcome of 'period game. yes both can be ie (cooperation, made better off if they collende cooperation) is a pareto improvement,