When cost and demand are stable over time in an industry, repetition of Prisoners' Dilemma situations:
A) can yield cooperative outcomes because firms can explicitly collude to set prices.
B) can yield cooperative outcomes even when firms do not explicitly collude to set prices.
C) will tend to yield noncooperative outcomes.
D) will always yield noncooperative outcomes.
E) Cooperative or noncooperative outcomes may occur, but cooperation is harder than when the market is unstable.

Question

Quizplus · Accepted Answer

When cost and demand are stable over time in an industry, repetition of Prisoners' Dilemma situations can lead to firms developing a reputation for cooperation, which can lead to cooperative outcomes even when there is no explicit collusion to set prices. This is known as the "tit-for-tat" strategy, where firms match the other's behavior in each round. As a result, firms can achieve profitable outcomes by cooperating rather than defecting. However, it is important to note that this outcome is not guaranteed and depends on various factors, such as the number of firms in the industry and the degree of transparency.

When Cost and Demand Are Stable Over Time in an Industry