You and your rival must simultaneously decide what price to advertise in the weekly newspaper. If you each charge a low price, you each earn zero profits. If you each charge a high price, you each earn profits of $3. If you charge different prices, the one charging the higher price loses $5 and the one charging the lower price makes $5.
a. Find the equilibrium when there are no repeated transactions.
b. Now, suppose there are repeated transactions. If the interest rate is 10%, what will be the outcome?
(Note: there is no need to work out net present value; it is just mentioned to make the exercise realistic.)