Owing to the “dominant strategy” (or the strategy that is best for one player when they do not know how the other player will act), the Prisoners’ Dilemma illustrates why cooperation is difficult to maintain (even when it is mutually beneficial for the captured prisoners to cooperate).
Like individuals, firms have a bias against cooperation:
- Even though cooperation (via a cartel aimed at raising prices) would increase profits; and
- Each firm has an incentive to cheat.
When an oligopoly dominates a market:
- Production is too low;Prices are too high; and
- Optimal public policy includes promoting competition and preventing price fixing.
Still, people sometimes DO cooperate:
- When the Prisoners’ Dilemma game is repeated a number of times (to illustrate the preferred outcome); and
- As a result of the [purposeful or accidental] use of a “tit-for-tat” strategy. The “tit-for-tat” strategy includes mimicking your rival’s action – renege or cooperate – in subsequent rounds of play.