Answer to Question #225575 in Microeconomics for Lsg

Question

A) Which firm has a dominant strategy? (2) What strategy should each firm follow? (2)

B) Assume that the game is to be played an infinite number of times. (Or, equivalently, imagine that neither firm knows for certain when rounds of the game will end, so there is always a positive chance that another round is to be played after the present one.) Would the tit-for-tat strategy would be a reasonable choice? Explain this strategy. (6)

C) Assume that the game is to be played a very large (but finite) number of times. What is the appropriate strategy if both firms are always rational? (4)

Answer 1

a)

Player one.

The strategy that should be followed is to always cheat because it is the only Nash equilibrium.

b)

At the last stage, this is like a one shot game hence the dominant strategy is for both players to cheat. However, if both parties know that the other will cheat, no reason to cooperate . If both cheat other is no incentive to cooperate so tit-for-tat strategy wont be effective.

c)

there will be a dominant strategy.