Assume that two clothing manufacturers, Lands' End and L. L. Bean, market their goods strictly online. Each produces an essentially identical field coat. The cost of producing such a coat is exactly $100. Because the field coats are perfect substitutes, customers will flock to the seller that offers the lowest price. If both firms offer identical prices, each receives half the customers. For simplicity, assume that the two firms have the choice of pricing at whole-dollar prices of $103, $102, or $101. Market demand at $103 is 100 coats; at $102, 110 coats; and at $101, 120 coats. The profit each firm would earn at various prices is shown in the accompanying payoff matrix.
L. L. Bean
$103 $102 $101
Lands' End $103 $150, $150
$0 $220 $0
a. The equilibrium outcome of this game is .
b. Collusion between Lands' End and L. L. Bean likely to last, since both firms have incentives to .
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