Answer to Question #108428 in Microeconomics for ghhd

Question

Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero). The cooperative outcome in this situation is

Answer 1

Oligopoly on the model of the cartel.

The best strategy for the oligopoly is conspiracy with competitors about production prices, production volumes. Collusion provides an opportunity to strengthen the power of each of the firms and use the opportunities for economic profit in such a size that it would receive a monopoly, if the market was a monopoly.