Question

Describe and explain the Prisoner's Dilemma. Discuss its implications for firms' pricing in an oligopolistic market.

Answer 1

Prisoner’s dilemma refers to a game that displays why two individuals might not cooperate, although if it shows that it is in their best interests to do. The prisoner’s dilemma refers to a type of game that illustrates why cooperation is hard to maintain for oligopolists although it is mutually beneficial. In such a game, the dominant strategy of each actor is to defect but the acting in self-interest results to a sub-optimal collective outcome.

Similarly to the prisoner’s dilemma scenario, the cooperation is hard to maintain in an oligopolistic market because cooperation is not in the best interest of the individual players. Although the collective outcome would be enhanced if oligopoly firms cooperated, and were therefore able to maintain high prices, low production, and monopoly profits.