Principles of Economics- Mankiw (5th) 352

Principles of Economics- Mankiw (5th) 352 - 362 PA R T F I...

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362 PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY Throughout the era of the Cold War, the United States and the Soviet Union attempted to solve this problem through negotiation and agreements over arms control. The problems that the two countries faced were similar to those that oli- gopolists encounter in trying to maintain a cartel. Just as oligopolists argue over production levels, the United States and the Soviet Union argued over the amount of arms that each country would be allowed. And just as cartels have trouble en- forcing production levels, the United States and the Soviet Union each feared that the other country would cheat on any agreement. In both arms races and oligopo- lies, the relentless logic of self-interest drives the participants toward a noncoop- erative outcome that is worse for each party. Advertising When two firms advertise to attract the same customers, they face a problem similar to the prisoners’ dilemma. For example, consider the deci- sions facing two cigarette companies, Marlboro and Camel. If neither company ad-
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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