The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. This game is an example of a:
A)cartel.
B)credible promise.
C)prisoner's dilemma.
D)game with multiple equilibria.

Question

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital.  This game is an example of a:
A)cartel. 
B)credible promise. 
C)prisoner's dilemma. 
D)game with multiple equilibria.

Quizplus · Accepted Answer

This is a prisoner's dilemma game because both firms would benefit if both invested in new capital. However, if one firm invests and the other doesn't, the one that doesn't invest will have a higher payoff. Therefore, in a rational decision-making process, both firms will choose not to invest, even though their combined payoff would be higher if they both did invest. This ultimately leads to a suboptimal outcome for both firms.

The Payoff Matrix Below Shows the Payoffs (In Millions of Dollars)