Suppose that two mining companies Australian Minerals

Company #9565
Suppose that two mining companies Australian Minerals Company

Suppose that two mining companies, Australian Minerals Company (AMC) and South African
Mines, Inc. (SAMI), control the only sources of a rare mineral used in making certain electronic
components. The companies have agreed to form a cartel to set the (profit-maximizing) price of
the mineral. Each company must decide whether to abide by the agreement (i.e., not offer
secret price cuts to customers) or not abide (i.e., offer secret price cuts to customers). If both
companies abide by the agreement, AMC will earn an annual profit of $30 million and SAMI will
earn an annual profit of $20 million from sales of the mineral. If AMC does not abide and SAMI
abides by the agreement, then AMC earns $40 million and SAMI earns $5 million. If SAMI does
not abide and AMC abides by the agreement, then AMC earns $10 million and SAMI earns $30
million. If both companies do not abide by the agreement, then AMC earns $15 million and
SAMI earns $10 million.
a. Develop a payoff matrix for this decision-making problem.
b. In the absence of a binding and enforceable agreement, determine the dominant strategy for
AMC.
c. Determine the dominant strategy for SAMI.
d. If the two firms can enter into a binding and enforceable agreement, determine the strategy
that each firm should choose.

Suppose that two mining companies Australian Minerals Company

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