choice in the table).

•

If A thinks that B will cooperate by holding down output, then A may seize the opportunity to earn higher

profits by raising output. After all, if B is going to hold down output, then A can earn $1,500 in profits by

expanding output (the bottom left-hand choice in the table) compared with only $1,000 by holding down

output as well (the upper left-hand choice in the table).

Thus, firm A will reason that it makes sense to expand output if B holds down output and that it also makes

sense to expand output if B raises output. Again, B faces a parallel set of decisions that will lead B also to

expand output.

The result of this prisoner’s dilemma is often that even though A and B could make the highest combined

profits by cooperating in producing a lower level of output and acting like a monopolist, the two firms may well

end up in a situation where they each increase output and earn only $400 each in profits. The following Clear It
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