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There are two firms in an industry 1 and 2 Firm 2 has either high production costs or low production costs

4. (25 points) There are two firms in an industry, 1 and 2. Firm 2 has either high production costs or low production costs.

4. (25 points) There are two firms in an industry, 1 and 2. Firm 2 has either high production costs or low production costs. Its costs are private information. Firm 2 knows if its costs are high or low; Firm 1 knows that 2's costs are high with probability .75 and low with probability .25. Firm 1 will choose either High Prices or Low Prices. Firm 2 will observe Firm l's prices and then it will choose High Prices or Low Prices. If Firm 2 has high costs then the payoffs in this game are Firm 2 High Prices 3,8 Low Prices 0,6 2,4 High Prices Low Prices Firm 1 4,2 If Firm 2 has low costs then the payoffs in this game are Firm 2 High Prices 3,4 4,2 High Prices Low Prices Low Prices 0,8 1. 2.6 Firm 1 Consider the following strategies: • If Firm 2's costs are high it will choose High Prices if Firm 1 chooses High Prices and Low Prices if Firm 1 chooses Low Prices. If Firm 2's costs are low it will choose Low Prices regardless of what prices Firm 1 chooses. • Firm 1 chooses Low Prices. Do these strategies form a Bayes-Nash equilibrium? Defend your answer carefully.

Feb 07 2020 View more View Less

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