It postulates that each firm should begin by

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It postulates that each firm should begin by cooperating and cooperate as long as the rival cooperates and refuse to cooperate when the rival does not cooperate. ( b ) The following conditions are usually required for tit-for-tat to be the best strategy: (1) there must be a reasonably stable set of players; (2) the number of players must be small, preferably two; (3) each firm must be able to quickly detect (and be willing and able to quickly retaliate for) cheating by other firms; (4) demand and cost conditions must be relatively stable; and (5) the number of moves must be infinite, or at least very large and uncertain. b. Problems: 2. ( a ) When firm B charges a low price, firm A will earn a profit of 1 when it also charges a low price and a profit of −1 (i.e., a loss of 1) when it charges a high price. When firm B charges a high price, firm A earns a profit of 3 when it charges a low price and a profit of 4 when it charges a high price. Therefore, firm A does not have a dominant strategy. ( b ) When firm A charges a low price, firm B earns a profit of 1 when it also charges a low price and a profit of −1 when it charges a high price. Similarly, when firm A charges a high price, firm B earns a profit of 3 when it charges a low price and a profit of 2 when it charges a high price. Therefore, charging a low price is the dominant strategy for firm B. ( c ) The optimal strategy for firm B is its dominant strategy of charging a low price. The optimal strategy for firm A is a low price, given that firm B will charge a low price.
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