The Oligopoly Version of the Prisoner’s Dilemma

The members of an oligopoly can face a prisoner’s dilemma, also. If each of the oligopolists cooperates in

holding down output, then high monopoly profits are possible. Each oligopolist, however, must worry that

while it is holding down output, other firms are taking advantage of the high price by raising output and

earning higher profits. Table 10.3 shows the prisoner’s dilemma for a two-firm oligopoly—known as a duopoly.

If Firms A and B both agree to hold down output, they are acting together as a monopoly and will each earn

$1,000 in profits. However, both firms’ dominant strategy is to increase output, in which case each will earn

$400 in profits.

Firm B

Hold Down Output (cooperate

Increase Output (do not cooperate

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)
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