Prairie Glen and Mountain View sell flavored fizzy water in a market where they are the only two sellers. Each is considering what actions to undertake in the following week. The payoff matrix shown here shows each firm's daily profits for each combination of actions. The first entry represents Prarie Glen's payoff and the second entry represents Mountain View's payoff.

Which set of strategies will these firms choose if they collude and form a cartel?

Choose 1 answer:
A) Prairie Glen prices low, Mountain View doesn't advertise
(B) Prairie Glen prices low, Mountain View advertises
(C) Prairie Glen prices high, Mountain View advertises
(D) There's no cartel outcome
(E) Prairie Glen prices high, Mountain View doesn't advertise

Question

Prairie Glen and Mountain View sell flavored fizzy water in a market where they are the only two sellers. Each is considering what actions to undertake in the following week. The payoff matrix shown here shows each firm's daily profits for each combination of actions. The first entry represents Prarie Glen's payoff and the second entry represents Mountain View's payoff.

Which set of strategies will these firms choose if they collude and form a cartel?

Choose 1 answer:
A) Prairie Glen prices low, Mountain View doesn't advertise
(B) Prairie Glen prices low, Mountain View advertises
(C) Prairie Glen prices high, Mountain View advertises
(D) There's no cartel outcome
(E) Prairie Glen prices high, Mountain View doesn't advertise

Accepted Answer

∻Solution∻ ‖ a ⋮ Collusion and Cartel Formation: When firms collude and form a cartel, they aim to maximize their joint profits by coordinating their strategies. In this case, Prairie Glen and Mountain View will choose the set of strategies that yield the highest combined payoff. ‖ ‖ b ⋮ Payoff Matrix Analysis: The payoff matrix provided shows the following payoffs for each combination of strategies: - Price High, Advertise: $(1000, 1000)$ - Price High, Don't Advertise: $(2500, 500)$ - Price Low, Advertise: $(500, 2500)$ - Price Low, Don't Advertise: $(2000, 2000)$ To find the optimal cartel strategy, we sum the payoffs for each combination: - Price High, Advertise: $1000 + 1000 = 2000$ - Price High, Don't Advertise: $2500 + 500 = 3000$ - Price Low, Advertise: $500 + 2500 = 3000$ - Price Low, Don't Advertise: $2000 + 2000 = 4000$ The highest combined payoff is $4000$, which occurs when both firms choose to price low and not advertise. ‖ ∻Answer∻ ⚹ Prairie Glen prices low, Mountain View doesn't advertise ⚹ ∻Key Concept∻ ⚹ Collusion and Cartel Formation ⚹ ∻Explanation∻ ⚹ When firms collude and form a cartel, they aim to maximize their joint profits by coordinating their strategies. In this case, the highest combined payoff of $4000$ occurs when both firms choose to price low and not advertise. ⚹◊What impact does forming a cartel have on the pricing and advertising strategies of Prairie Glen and Mountain View in this scenario⍭ Generate me a similar question◊

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