Question

At a time when demand for ready-to-eat cereal was stagnant, a spokesperson for the cereal maker Kellogg’s was quoted as saying, " . . . for the past several years, our individual company growth has come out of the other fellow’s hide." Kellogg’s has been producing cereal since 1906 and continues to implement strategies that make it a leader in the cereal industry. Suppose that when Kellogg’s and its largest rival advertise, each company earns $0 billion in profits. When neither company advertises, each company earns profits of $10 billion. For what range of interest rates could these firms use trigger strategies to support the collusive level of advertising?

Answer 1

Answer:

23 percent

Explanation:

Base on the scenario been described in the question, the normal form game looks like this:Kellogg’sRivalAdvertiseNoYesNo$8, $8$-4, $43Yes$43,$-4$0, $0Collusion is profitable under the usual trigger strategies if (πCheat- πCoop) / (πCoop- πN) ≤ (1 / i), or ($43 - $8) / ($8 - 0) = 4.38 ≤ (1 / i). Thus, one requirement is for the interest rate to be lessthan 23 percent. As our answer