Suppose that the firms in an oligopolistic market engage in a price war and, as a result, all firms earn lower profits. Game theory would describe this as
A) an irrational strategy.
B) a prisoners' dilemma.
C) price leadership.
D) a contestable market.

Question

Quizplus · Accepted Answer

A price war in an oligopolistic market leading to lower profits for all firms is a classic example of a prisoners' dilemma in game theory. In this scenario, each firm aims to undercut the prices of its competitors to increase market share, but when all firms do this, they all end up worse off. This outcome reflects the prisoners' dilemma, where individual rational strategies lead to a collectively worse outcome.

Suppose That the Firms in an Oligopolistic Market Engage in a Price