Mostly
summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 17 of 36 - Oligopoly
Section 12 of 23
…
Figure 3 - An
Arms-Race Game
The logic of the prisoners' dilemma in
which self-interest prevents cooperation and leads to an inferior outcome for
the two prisoners applies to many other situations.
In the decades after World War II the
world's two military superpowers, the U.S. and the Soviet Union (U.S.S.R.), were
in a competition over military power.
Consider the decisions of the U.S. and
the U.S.S.R. about whether to build new weapons or to disarm.
…
Each country prefers to have more arms
than the other because a larger arsenal would give it more relative power
But each country also prefers to live
in a safe world.
Figure 3 shows the arm-disarm game.
If the U.S.S.R. chooses to arm, the U.S.
is better off arming to prevent loss of power and deterrence.
If the U.S.S.R. chooses to disarm, the U.S.
is again better off arming because doing so would make it more powerful .
Arming is a dominant strategy for each
country.
Thus, each country
· chooses to arm and continue the arms
race
· resulting in the inferior arm-arm
outcome with both countries at risk
…
The U.S. and the U.S.S.R. attempted to solve the problem with arms
control negotiations and agreements.
The problems for the two countries were
similar to those oligopolists face in trying to maintain a cartel.
Just as oligopolists argue over production
levels, the U.S. and the U.S.S.R. argued
over the amount of arms each country would be allowed.
Just as cartels have trouble enforcing
production levels, the U.S. and the U.S.S.R. each feared the other country would cheat on
any agreement.
In both arms races and
oligopolies
· pushes the participants toward a non-cooperative
outcome, in this case both arm
· which is worse for each party
… …
participants
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