An industry consists of two rms which can either colludeor com- petein each period. The per-period payos of doing either are as follows:

An industry consists of two rms which can either colludeor com-

petein each period. The per-period payo¤s of doing either are as follows:

Firm 1

Firm 2 Collude Compete

Collude $50 $50 -$10 $75

Compete $75 -$10 $45 $45

If the rms initially collude, either of them can earn $25 extra by cheating on the agree-

ment and competing instead. The other rm can retaliate, however, by refusing to collude

in subsequent periods.

For how many periods would such retaliation have to last to deter cheating if the interest

rate is 0%, so that the rms do not discount future prots?

3