When each firm uses the strategy that maximizes its profit, it is possible for the equilibrium result to yield the worst possible joint equilibrium for all firms.

Question

Quizplus · Accepted Answer

This is a classic example of the Prisoner's Dilemma game theory scenario. Each firm chooses the strategy that would maximize its own profit, but in doing so, they end up in a suboptimal joint equilibrium where all of them would have been better off if they had cooperated and coordinated their strategies.

When Each Firm Uses the Strategy That Maximizes Its Profit