Question

consider two firms whose net profits for the following years are shown by the following payoff matrix：

firm b

invest don’t invest

invest （60，80） （10，40）

firm a

don’t invest （20，20） （30，50）   

What type of market interaction are these payoffs consistent with？

（a）A & B are deciding whether to invest in a joint project

（b）A & B are in the Prisoners’ Dilemma game

（c）Firms A & B form a cartel

（d）A & B are competing in a natural monopoly market。

Eexplain your reasoning in the previous questions

Answer 1

There is no dominant strategy for any firm here. If column player selects the invest strategy, then here the row also selects the same and vice versa.

Likewise, if the column player goes with do not invest strategy, then other player also goes with same strategy and vice versa.

The profit is maximized when both go with the invest stategy.

Thus both will have strong incentive to form the collusion.

The deviation from the invest strategy would not be profitable.

Thus, right answer is : (c)