Firm B High Price Low Price High Price A:8 B:8 A;3 B:20 Low Price A:20 B:3...
Firm B
| High Price | Low Price | |
|
High Price |
A:8 B:8 |
A;3 B:20 |
| Low Price |
A:20 B:3 |
A:6 B:6 |
*Firm A on Left, Firm B on top
- What is the PV of profits if the firms collude successfully assuming an interest rate of 15%?
- What is PV of profits for Firm A if it defects from the collusive behavior assuming an interest rate of 15%?
Homework Answers
Discount factor d = 1/1 + r
d = 1/1.15 = 0.8696
Present value of profits for any of the firm when they collude (assuming infinite time period) = 8. Total profit for both firms = 16.
Present value of profits for the defecting firm = 1 period profit(1 - d) + defecting profit x d
= 20(1 - 0.8696) + 6*0.8696
= 7.82.
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