Two railroads, Big East and Little East have the choice of pricing high or low. Each company's profit depends on how the other company responds to its pricing strategy. If both firms collude and agree on a high price, they each earn $30 in profit. If one prices low and the other prices high, the low-price firm earns $50 while the high price earns $4'.
a. Draw the payoff matrix for the possible one- shot (non repetitive) outcomes using game theory. What are the assumptions underlying each outcome.
b. Assuming no collusion, what would you expect the outcome to be. Explain why.
c. Assume that the two railroads compete over time (i.e., the game is repetitive). Explain how and why you would expect the outcome(s) to change