Microeconomics · free preview
The Pricing Dilemma
Two rivals pricing the same product face a dilemma where undercutting pays whatever the other does, so both end up cutting, and the cartel price collapses without anyone's intention.
1. The game
The game
2. The dominant pull
The dominant pull
3. Why cartels wobble
Why cartels wobble
4. Tacit versus explicit
Tacit versus explicit
5. Finding the equilibrium
In the airline matrix, what is the Nash equilibrium of the one-shot fare game?
6. The cartel's crack
OPEC members agree to quotas. Why is the agreement chronically hard to hold?
7. The temptations
In the fare game, an airline holding at 200 while its rival cuts earns 10 million, while cutting alongside the rival earns 20 million. Compute the payoff improvement in millions from cutting in that situation, and write the number.
8. The dominant pull
In the fare game, if both airlines hold fares each earns 50 million, if one cuts while the other holds the cutter earns 80 and the holder 10, and if both cut each earns 15. What should each airline do in the one-shot game?
9. The cartel's chronic wobble
OPEC members agree to production quotas. Why is the agreement chronically hard to hold?
10. The temptation gap
In a market where mutual restraint earns each firm 50 million and quiet defection alone earns 80 million, compute the one-time gain from defecting against a restrained rival, and write the number.
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