Professional Documents
Culture Documents
Arts Strategies
Deny
Bobs
Strategies
Confess
Confess
3 yrs.
3 yrs.
1 yr.
10 yrs.
Deny
10 yrs.
1 yr.
2 yrs.
2 yrs.
Thus, both parties will rationally choose to confess, and take three years even though they
could have been better off denying. Each party does this because, considering the possible
options of the other party, they always found the better option was to confess. When neither
party has an incentive to change their strategy, they are in Nash Equilibrium.
Nash Equilibrium
Acmes Strategies
Comply
Belcos
Strategies
Cheat
Confess
Cheat Comply
$0
$0
4.5m
-1.0m
-1.0m
4.5m
2.0m
2.0m
Thus, both parties will rationally choose to cheat, and earn zero profits even though they could have been
better off by complying with a collusive deal to restrict output. They will compete as fiercely as pure competitors
-continually lowering their prices and increasing production until they reach a point where they are breaking
even. This is where they will find themselves in Nash Equilibrium. They will have no motivation to move from