with other firm)

with other firm)

TABLE 10.3 A Prisoner’s Dilemma for Oligopolists

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10.2 • Oligopoly 249

Firm

A

Hold Down Output (cooperate with

other firm)

Increase Output (do not cooperate

with other firm)

A gets $1,000, B gets $1,000

A gets $200, B gets $1,500

A gets $1,500, B gets $200

A gets $400, B gets $400

TABLE 10.3 A Prisoner’s Dilemma for Oligopolists

Can the two firms trust each other? Consider the situation of Firm A:

•

If A thinks that B will cheat on their agreement and increase output, then A will increase output, too,

because for A the profit of $400 when both firms increase output (the bottom right-hand choice in Table

10.3) is better than a profit of only $200 if A keeps output low and B raises output (the upper right-hand

choice in the table).

•

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