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Using what we know about collusion and game theory, how might the prisoners' dilemma play out...

  1. Using what we know about collusion and game theory, how might the prisoners' dilemma play out in an oligopolistic market? Draw a 2x2 matrix, label all sides and in each cell define the payoffs for each firm.
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Answer #1

Starting form the point where the firms in the market, firm 1 and firm 2 will not be colluding while advertising, they will both advertise and get a payoff of 8000 each, Here, if the collude they will not advertise and they both get a payoff of 11,000 each, if they were not colluding they will look for a greater profit and advertise and the one advertising will get a output of 16,000 but if both advertise the payoff will reduce at 8000.

Hence, they will collude and not advertise at all, getting a payoff of 11,000 each.

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