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?

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In this scenario, both firms have dominant strategies of setting a low price (since regardless of what the other firm does, they will earn more by setting a low price). However, if both firms follow their dominant strategy, they end up with a joint payoff of $5000, which is less than what they could earn if they both set a high price ($10000 joint payoff). Therefore, the Nash equilibrium (where both firms set a low price) does not maximize the joint payoff. This is a classic example of a prisoners' dilemma, where the dominant strategies lead to a suboptimal outcome for both parties.

Suppose There Are Only Two Firms in an Industry