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Game Theory Economics

Hi what i understand is how both firms lose out during tacit collusion one firm undercuts the other leading to the other firm undercutting, their total revenue is at its lowest.
My problem is how to explain why a supermarket is not willing to cut prices and how to explain it in a 2by 2 matrix. I understand it will lose its monopsony power, ok thanks
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James_pa
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A better way for me to phrase this question is the possible ways a 2by 2 game matrix can be shown in different scenarios, thanks :s
Not sure that you can use a game theory matrix, since the idea behind them (at least for AQA) is that the first firm to lower their prices gains a larger market share thus more profit and if the other firm lowered prices both firms would be worse off.
You can use it to demonstrate the consequences of lowering prices which as you said, was decreased revenue. You could also say that it could possibly start a price war leading to further decreased revenue as each firm tries to undercut the others. Also you can say how managers could be on performance-based pay schemes so if they start making less revenue then it'll result in them getting a pay cut.
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James_pa
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Original post by MrFartFace
You can use it to demonstrate the consequences of lowering prices which as you said, was decreased revenue. You could also say that it could possibly start a price war leading to further decreased revenue as each firm tries to undercut the others. Also you can say how managers could be on performance-based pay schemes so if they start making less revenue then it'll result in them getting a pay cut.


Nice response

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