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Unformatted text preview: soda at $1. Their payoffs (profits in millions of dollars) are: Pepsi Comply: $1 Cheat: 75¢ Coke Comply: $1 6, 7 2, 8 Cheat: 75¢ 7, 3 5, 4 a. Is this game a Prisoner’s Dilemma? Explain why. b. Suppose that the companies are playing this game for three years. At the end of this time, they know that the government will begin regulating the industry, thereby eliminating the strategic interaction between them. Suppose also that Pepsi has credibly committed to playing a grim strategy . i. If the interest rate is 10%, fill in the rest of the following table: Present value of Coke’s Payoffs 1 st Year Comply: 6 Comply: 6 Comply: 6 Cheat: 7 2 nd Year Comply: 5.45 Cheat: _____ Comply: ____ Cheat: 4.56 3 rd Year Comply: 4.96 Cheat: _____ Cheat: _____ Cheat: _____ Total 16.41 ______ ______ ______ ii. Which strategy should Coke follow? (A strategy in this case is an action that Coke will take in each year.) Explain briefly how you reached this conclusion....
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This test prep was uploaded on 04/22/2008 for the course ECON 242 taught by Professor Nonnenmacher during the Spring '06 term at Allegheny.
- Spring '06