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14 January, 06:23

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

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  1. 14 January, 09:20
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    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.
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Home » Business » 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?
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