- Jüri Eintalu
GAME THEORY An interactive model You can move the point MOVE to change the quantities of production of the two firms. In the right-side window, you can see the resulting profits of the firms. The simplest model of Cournot Duopoly is used.
2 competitive firms: 1 and 2. Each one is trying to maximize one's profit. Q - Quantity of production (firm's choice) Π - Profit R - Reaction functions (showing the best responses to competitor's choices) In the case of CARTEL agreement, the total profit of the two firms is maximal. However, that agreement is unstable. If one stays at the corresponding amount of production, the other one is motivated to increase its amount of production. The NASH equilibrium is stable. No one is motivated to be the first one to leave that situation. However, in the Nash equilibrium, the quantities of production are larger than in the case of cartel agreement (and the price is lower). Moreover, in the Nash equilibrium, the profits are lower than in the case of cartel agreement. This is a continuous case of the Prisoner's Dilemma. Tasks: 1. Moving the point MOVE, check the claims made above. 2. What happens, if the firms are making their choices sequentially - by turns, at each step maximizing one's profit?