Let two oil firms, A and B, in a duopoly be choosing their production decisions. For simplicity, assume they can choose two production levels: HI and LO. If both firms chooose LO, they each earn $3 billion. If both firms choose HI, they each earn $2 billion. If one firm chooses HI while the other chooses low, the HI firm earns $4 billion and the LO firm earns $1 billion. What is the strategy that optimizes the payoffs to both firms if they collude?
A chooses LO, B chooses LO
A chooses HI, B chooses LO
A chooses LO, B chooses HI
A chooses HI, B chooses HI
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A chooses HI, B chooses LO...
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