Suppose the demand for steel bars fluctuates with the business cycle. This market has two firms that produce these bar and they are consider colluding to receive half of the monopoly profits.
During an expansion the demand is: Q=7000 -100P
and during a recession demand is: Q=3000 -100P.
Assume also that expansions and recessions are equally likely and that firms know that the economic conditions are before setting their prices. Marginal cost for both firms is constant at $10.
A) What is the lowest value of that will sustain a trigger price strategy that maintains the appropriate monopoly price during both recession and expansions?
B) If gamma falls slightly below the value calculated in part (a), how should the trigger price strategies be adjusted to retain profitable tacit collusion?