1. In the collusion game, we found that collusion was only sustainable in the infinite horizon...

1. In the collusion game, we found that collusion was only sustainable in the infinite horizon repeated game. One Nash Equilibrium of that game can be found when all players play a “grim trigger” strategy, where they collude until an opponent chooses to compete, and then compete for all future rounds as a punishment. In such a game, if the one period bonus that comes from competing is low enough, firms always collude and the punishment is never triggered. However, let’s think a little deeper about this Nash Equilibrium. Is the punishment (vowing to compete forever after one deviates) realistic, especially if firms can communicate freely? Why or why not? (Hint: Is a grim trigger Nash Equilibrium a Subgame Perfect Nash Equilibrium? What kinds of Nash Equilibria does Subgame Perfection rule out in sequential games?)

Expert Solution

Ans) In collusion game it is strategy that players collude with another player in order to deceive other, it can be illegal or legal. Legal means it is for the purpose of serving others but as a whole it can never be illegal. Collusion form less competition as many firm collude with each other in the market to face overall competition. However, if one firm cancel this collusion or the opponent choose to compete with the firm the punishment is real, as now the opponent knows every strategy which the other firm can take in particular situation, so to make profit or to increase the share of market's demand they will compete forever in the market. As everyone wants to earn maximum share/profit from the market, they will compete to earn maximum. While grim trigger is the strategy in which the player will cooperate till the opponent is cooperating, when the opponent defects the player also choose not to cooperate with him and the situation of punishment will be present in the market for the share of profit in the market.

Rahul Sunny answered 57 minutes ago

In the collusion game, we found that collusion was only sustainable in the infinite horizon repeated...

In the collusion game, we found that collusion was only sustainable in the infinite horizon repeated game. One Nash Equilbrium of that game can be found when all players play a “grim trigger” strategy, where they collude until an opponent chooses to compete, and then compete for all future rounds as a punishment. In such a game, if the one period bonus that comes from competing is low enough, firms always collude and the punishment is never triggered. However, let’s...

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TOPIC: Game Theory and Equilibria In the collusion game, we found that collusion was only sustainable in the infinite horizon repeated game. One Nash Equilbrium of that game can be found when all players play a “grim trigger” strategy, where they collude until an opponent chooses to compete, and then compete for all future rounds as a punishment. In such a game, if the one period bonus that comes from competing is low enough, firms always collude and the punishment...

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