Game Theory and Prisoner's Dilemma in Oligopoly
Microeconomics
A payoff matrix showing the prisoner's dilemma in an oligopoly, where two interdependent firms choose between a high price and a low price.
Curves and Elements
oligopoly 1
Oligopoly 1: One of the two interdependent firms choosing between a high price and a low price.
oligopoly 2
Oligopoly 2: The other interdependent firm choosing between a high price and a low price.
payoffs
Payoffs: The profits each firm receives under each combination of strategies, shown in euros.
cooperative outcome
Cooperative Outcome: If both firms choose a high price, both earn €1000, which is better for both firms collectively.
non cooperative outcome
Non-cooperative Outcome: If both firms choose a low price, both earn €300, which is worse for both firms collectively.
prisoners dilemma
Prisoner's Dilemma: Each firm has an incentive to lower price individually, but if both firms do this, both firms are worse off.
Game theory examines the strategic behavior of firms that are interdependent, meaning each firm’s decision affects the other.
The payoff matrix shows the prisoner's dilemma faced by two oligopolists when each chooses either a high price or a low price.
If both firms choose a high price, both earn €1000, which is the cooperative outcome.
Each firm has an incentive to lower price to increase its own payoff to €1500, but if both firms lower price, both earn only €300.
This shows the prisoner's dilemma because individual self-interest can lead both firms to a worse outcome than cooperation.
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