We can think of oligopoly production decisions as a prisoner's dilemma. The two firms, Bigco and Broadco, are considering increasing production or maintaining their current production. Suppose the payoff matrix is:
| | Bigco | |
|----------|--------------|----------|
| Broadco | Increase Q | Current Q|
| | | |
| Current Q| Bigco 10 | Bigco 50 |
| | Bigco | |
|----------|--------------|----------|
| Broadco | Current Q | |
| | | |
| | Broadco 10 | Broadco 30|
| | | |
Assume that each firm knows the payoff matrix and believes the other firm will act in its own interest. What will be the equilibrium policies if each firm acts rationally to maximize its welfare?
- Bigco increases its output and Broadco maintains its output.
- Broadco increases its output and Bigco maintains its output.
