The application of game theory to economics allows us to understand firm behavior in some forms of oligopoly. Game theory suggests that in a two-firm industry, each firm will
A) avoid pricing high when the other prices low
B) select high prices and defend that selection because, in the long run, their profits are higher than if they competed by lowering prices
C) end up mistaking the other's intentions, which results in low prices and low profit for both in the long run
D) end up colluding with the other to form a cartel
E) agree with the other not to allow other firms to enter the industry

Question

Quizplus · Accepted Answer

Game theory in oligopolies often leads to firms avoiding pricing high when the other prices low, as they anticipate competitive responses and aim to maximize their own payoff.

The Application of Game Theory to Economics Allows Us to Understand