Question

A duopolists' dilemma occurs when two firms in a market would be better off if

a. both firms act jointly as a cartel and choose the best price.
b. both firms adopt price matching.
c. one firm refuses to participate in the cartel.
d. both choose the high price but instead, each chooses the low price.

Answer 1

The correct answer is option d.

Step-by-step explanation:

The duopolist dilemma refers to the situation when two firms in a duopoly market collective choose a higher price to maximize their collective profits but each firm individually lowers their price.

This happens because an individual firm has the incentive to increase its profit and market share by lowering its price. It does not takes the reaction of its rival into consideration and lowers its price. In reaction, the rival firm also lowers its price. So the overall market price is decreased.