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

Question

Business

Charlie

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

+1

Answers (1)

Know the Answer?

Jaslyn Price · Answer 1

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.