Joe and Steve are duopolists who each can follow two strategies: cooperate and jointly act like a monopolist, or don't cooperate (cheat) and act like duopolists. Their profits are as follows:If both cooperate: both receive $1 millionIf one cooperates:cooperator receives $200,000, cheater receives $1.2 millionIf both cheat:both receive $500,000What will they do?
What will be an ideal response?
Both will cheat and end up with $500,000. Why? Suppose you're Joe. If Steve cooperates, you're better off cheating, as you will get $1.2 million rather than $1 million. If Steve cheats, you're better off cheating, as you will get $500,000 rather than $200,000. So no matter what Steve does, Joe will cheat.
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