What is the dilemma faced by firms in oligopolySolutionOligo

What is the dilemma faced by firms in oligopoly?

Solution

Oligopolistic firms take their price and output decisions being aware that their competitor firms will react, but the direction and magnitude of such reaction is not known. This is known as Prisoners\' Dilemma.

This dilemma arises when, because the firms take decisions only to the best of their own self-interest, result of such decision is detrimental to collective interest. For example, 2 firms may see to maximize their own profits by taking independent decisions, without knowledge of how the other firm will react. But in reality, if both firms colluded and decided on their price and output decision, combined profit would have been higher.