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AP Microeconomics/Unit 4: Imperfect Competition
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Strategic Interaction in a Duopoly

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Consider a duopoly where two firms must decide whether to invest in a cost-reducing technology. If neither firm invests, each earns a profit of $8 million. If both firms invest, each earns a profit of $6 million. If one firm invests and the other does not, the investing firm earns $12 million and the non-investing firm earns $4 million. This strategic interaction is an example of which of the following?

A

Zero-sum game

B

Coordination game

C

Prisoner’s dilemma

D

Battle of the sexes

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