CHAPTER 16OLIGOPOLY361result is the inferior outcome (from Iran and Iraq’s standpoint) with low profits foreach country.This example illustrates why oligopolies have trouble maintaining monopolyprofits. The monopoly outcome is jointly rational for the oligopoly, but each oli-gopolist has an incentive to cheat. Just as self-interest drives the prisoners in theprisoners’ dilemma to confess, self-interest makes it difficult for the oligopoly tomaintain the cooperative outcome with low production, high prices, and monop-oly profits.OTHER EXAMPLES OF THE PRISONERS’ DILEMMAWe have seen how the prisoners’ dilemma can be used to understand the problemfacing oligopolies. The same logic applies to many other situations as well. Herewe consider three examples in which self-interest prevents cooperation and leadsto an inferior outcome for the parties involved.Arms RacesAn arms race is much like the prisoners’ dilemma. To see this,
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