The Nash equilibrium of this game is for Tying-the-Knot to set alow price and Bridezilla-No-More to set alow price. True or False: Both firms would be worse off if they cooperated and set a high price for their services, instead of using the Nash equilibrium. True False Suppose that the firms play this game indefinitely. Both firms agree to cooperate in order to maintain higher profits. To deter cheating, Tying-the-Knot announces that it will play a grim strategy. Given this strategy, what will happen if Bridezilla-No-More breaks the cooperative agreement in the first period

Tying-the-Knot and Bridezilla-No-More

1. The Nash equilibrium of this game is for Tying-the-Knot to set a low price and Bridezilla-No-More to set a low price.

True

2. Both firms would be worse off if they cooperated and set a high price for their services, instead of using the Nash equilibrium.

False

3. Given Tying-the-Knot grim strategy, if Bridezilla-No-More breaks the cooperative agreement in the first period,

there will be a permanent breakdown in cooperation between the two firms.

Explanation:

Playing the grim trigger strategy, Tying-the-Knot cooperates with Bridezilla-No-More in the first round and in the subsequent rounds as long as Bridezilla-No-More does not defect from the agreement.  Once Tying-the-Knot finds that Bridezilla-No-More has betrayed the agreement in the previous game, he will then defect forever.  Both firms will then lose as they cannot cooperate to achieve higher profits.