$20 million. The lower-right cell shows that if each firm produces two-
thirds of the monopoly output, each firm will earn a profit of only $17
million. Since joint profits must be maximized at the monopoly output,
the total profit in the upper-left cell ($40 M) is greater than the total profit
in the lower-right cell ($34 M).
The upper-right and lower-left cells show the profits in the case where
one firm produces one-half of the monopoly output and the other firm
produces two-thirds of the monopoly output. Note that in these cells, the
firm that produces more earns the greater profit. The firm that produces
one-half of the monopoly output is helping to restrict output and keep
prices high. The firm that produces two-thirds of the monopoly output
then benefits from the first firm’s output restrictions.
Strategic Behaviour
The payoff matrix shows the profit each player earns with each
combination of the two players’ moves. But what will actually happen? To
answer this question, we must first know whether the game being played
is cooperative or non-cooperative.
Cooperative Outcome
If the two firms in this duopoly can cooperate, the payoff matrix shows
that their highest joint profits will be earned if each firm produces one-
half of the monopoly output. This is the cooperative outcome. The payoff
matrix also shows, however, that if each firm thinks the other will
cooperate (by producing half of the monopoly output), then it has an