Question

Consider the payoff matrix at right.

a. the pair of strategies high outputhigh output is the only nash equilibrium.
b. the pair of strategies low outputlow output and low outputhigh output are the only nash equilibrium.
c. the pair of strategies high outputhigh output and high outputlow output are the only nash equilibria.
d. the pair of strategies low outputlow output is the only nash equilibrium.
e. the pair of strategies high outputhigh output and low outputlow output are the only nash equilibria

Answer 1

In the oligopoly version of the prisoner's dilemma, the rational strategy for both firms, leading to Nash equilibrium, is to increase output, resulting in lower profits compared to potential cooperation.

Step-by-step explanation:

The concept in question is related to a classic example in game theory, where firms within an oligopoly must decide whether to cooperate or to act in their own self-interest. According to the given scenario, both Firm A and Firm B will choose to expand their output because it dominates their strategy regardless of the other firm's decision. Their inability to trust each other to hold down output leads to a prisoner's dilemma, where the individually rational choice leads to a worse outcome for both firms compared to possible cooperation. Therefore, the Nash equilibria in this context are the strategies where both firms choose to expand their output.