The prisoners’ dilemma shows us that firms have an incentive tocollusion, or fix prices, but then they also havean incentive to cheat, or renege on their pricefixing. The prisoners’ dilemma shows us that firms can sometimes bemade better off if they ___________ instead of acting in their own____________.

There are three models of the oligopoly:

1. The kinked-demand theory, in which competitorswill match any price decrease and ignore any price increase.
   1. Because of this, the elasticity of demand for higher prices is________ elastic than the elasticity of demand for pricedecreases.
   2. In this model, there is no incentive for any firm to changeprice. Why?_____________________________________________________________

2. The collusive pricing model is one in whichall firms agree to fix prices.
3. 1. Each firm finds it most profitable to charge _________ price,but only if the rivals do.
   2. A _______ is a formal association in which the members displayovert collusion.

Oligopolies are inefficient because:

1. P is (greater than, less than, or equal to) min ATC meaningthat it is NOT ___________ efficient (i.e. the firm is producingwhere ATC is not at its minimum).
2. P is (greater than, less than, or equal to) MC meaning that isit NOT __________ efficient (i.e. the firm is under allocatingresources).