Figure 11-3 The Oligopolist’s Dilemma: To Cooperate or Compete?
Cooperation to determine the overall level of output can maximize
joint profits, but it leaves each firm with an incentive to cheat. The
figure shows a payoff matrix for a two-firm game. Firm A’s production is
indicated across the top, and its payoffs are shown in the light-shaded
triangles within each cell. Firm B’s production is indicated down the left
side, and its payoffs are shown in the dark-shaded triangles within each
cell.
If A and B cooperate, each produces one-half the monopoly output and
receives a profit of $20 million. If A and B do not cooperate, they each
end up producing two-thirds of the monopoly output and receiving a
profit of only $17 million. In this example, this non-cooperative outcome
is a Nash equilibrium, outlined by the thick border.
A Payoff Matrix
Figure 11-3 shows a payoff matrix for this simple game. It shows the
profits that each firm earns in each possible combination of the two firms’
actions. The upper-left cell in this example shows that if each firm
produces one-half of the monopoly output, each firm will earn profits of