Two duopoly firms that sell an identical good form a cartel. They decide to collude and fix the price of their good. In this prisoners' dilemma type situation, the likely outcome is
A) only one will cheat.
B) neither one will cheat.
C) both will cheat.
D) It is impossible to say.

Question

Quizplus · Accepted Answer

In a prisoner's dilemma type situation, the incentive for individual rationality leads both parties to cheat on the agreement, as each firm aims to maximize its own profit, even though mutual cooperation would yield a better outcome for both.

Two Duopoly Firms That Sell an Identical Good Form a Cartel