Answer to Question #72535 in Finance for jones

Question

Two firms operating under oligopoly are faced with two choices, to charge a high price or a low price. If one firm charges a low price while the other a high price, the firm that charges a low price attracts customers and earns a profit of $600,000 while the firm charging a high price loses customers and earns only $100,000. If both firms charge a high price they earn $400,000 each while if both charge a low price, they earn $200,000 each.
a) What profits are the firms likely to earn in the absence of cooperation?
b) If the firms cooperated, what profits would each firm earn?

Answer 1

a) In the absence of cooperation each firms will earn $200,000, because both firms charge a low price.
b) If the firms cooperated, both firms charge a high price, they earn $400,000 each