The problem with this strategy is t

The problem with this strategy is that it suffers from the same basic problem that afflicted many of the predatory threats discussed in Chapter6. The strategy lacks credibility. Suppose,for instance, that firm2 does choose to cooperate in the first round . Now think of firm2’s position at the start of its second and last interaction with firm1. The history of play to that point is one in which both firms adopted cooperative behavior in the first round and both earned a profit of s1.8 million. Further, firm2 has a promise from firm1 that, because firm2 cooperated in the first round, firm1 will continue to do so in the second. The problem that firm2 has is that this promise is worthless. When firm2 looks over the payoff matrix for the last round, it cannot fail to note that – regardless of firm1’s previous pledge-the dominant strategy for firm1 in the last round is not to cooperate. True, this would violate the cooperation promised in firm1’s strategy. But there is nothing firm2 can do subsequently to punish firm1 for breaking its promise. There is no third round in which to implement such punishment . Absent the threat of such retaliation, firm1 can rationally be expected to adopt the noncooperative behavior in the last round.