Suppose there are only two firms in an industry.If they each set a high price,they each earn $5000.If they each set a low price,they each earn $2500.If one firm sets a low price while the other sets a high price,the low- price firm earns $7000 while the high- price firm earns $1000.Does a prisoners' dilemma exist?

Question

Quizplus · Accepted Answer

A prisoners' dilemma exists because the equilibrium where both firms set a high price does not maximize the joint payoff. If both firms cooperated and set a low price, they would both earn more. However, each firm has an individual incentive to set a high price, which leads to a less favorable outcome for both in the Nash equilibrium.

Suppose There Are Only Two Firms in an Industry