Question

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm (Firm A) is large and the other firm (Firm B) is small, as shown in the prisoner's dilemma box: What is Firm B's most likely choice? Firm B colludes with Firm A Firm B cheats by selling more output Firm A colludes with Firm B A gets $1,000, B gets $100 A gets $800, B gets $200 Firm A cheats by selling more output A gets $1,050, B gets $50 A gets $500, B gets $2

Answer 1

Firm B's most likely choice would be to collude with Firm A in the given duopoly situation.

Step-by-step explanation:

In the given duopoly situation, Firm B's most likely choice would be to collude with Firm A. In the prisoner's dilemma box, the highest payoff for both firms is achieved when they cooperate by holding down output and acting together as a monopoly, earning $1,000 each. However, in a dominant strategy, both firms are inclined to cheat and sell more output, which results in lower profits of $400 each.

Answer 2

The maximum profit Firm A can earn if it chooses to cheat is $1050.

The maximum profit Firm B can earn if it chooses to cheat is $200.

The maximum profit Firm A can earn if it doesn't cheat is $1000.

The maximum profit Firm B can earn if it doesn't cheat is $100.

If Firm B chooses to cheat, and Finn A also cheats, then Firm B's profits would be 1 % of the profits that it would be making if Firm A did not cheat.

Similarly, if Firm B chooses to not cheat, and Firm A cheats, then Firm B's profits would be 50% of the profits that it would be making if Firm A also did not cheat.

Thus, Firm B's most likely choice should be to not cheat.