Two firms operating under oligopoly are faced with two choices, to charge a high price or a low price. If one firm charges a low price while the other a high price, the firm that charges a low price attracts customers and earns a profit of $600,000 while the firm charging a high price loses customers and earns only $100,000. If both firms charge a high price they earn $400,000 each while if both charge a low price, they earn $200,000 each.
a) What profits are the firms likely to earn in the absence of cooperation?
b) If the firms cooperated, what profits would each firm earn?
a) In the absence of cooperation each firms will earn $200,000, because both firms charge a low price. b) If the firms cooperated, both firms charge a high price, they earn $400,000 each