incentive to cheat and produce two-thirds of the monopoly output. Thus,
the cooperative outcome can only be achieved if the firms have some
effective way to enforce their output-restricting agreement. As we will see
in Chapter 12 , explicit output-restricting agreements are usually illegal.
Non-Cooperative Outcome
Now suppose the firms believe cooperation to be impossible because they
have no legal way of enforcing an agreement. What will be the non-
cooperative outcome in this duopoly game? To answer this question, we
must examine each player’s incentives, given the possible actions of the
other player.
Firm A reasons as follows: “If B produces one-half of the monopoly
output (upper row of the matrix), then my profit will be higher if I
produce two-thirds of the monopoly output. Moreover, if B produces two-
thirds of the monopoly output (bottom row of the matrix), my profit will
be higher if I also produce two-thirds of the monopoly output. Therefore,
no matter what B does, I will earn more profit if I produce two-thirds of
the monopoly output.” A quick look at the payoff matrix in Figure 11-3
reveals that this game is symmetric, and so Firm B’s reasoning will be
identical to Firm A’s: It will conclude that its profit will be higher if it
produces two-thirds of the monopoly output no matter what A does.
The final result is therefore clear. Each firm will end up producing two-
thirds of the monopoly output and each firm will receive a profit of $17
million. This is the non-cooperative outcome. Note that each firm will be