Two individuals (that are suspected "partners in crime") have been arrested for [illegally] possessing a gun. Further, the police have enough evidence to imprison each for one year on a weapons charge.

Still, since the police [correctly] suspect the pair are responsible for a recent bank robbery, they question each separately, offering you the following deal:

• If you confess and implicate your partner, you go free.

• If you do not confess but your partner implicates you, you receive a sentence of 20 years in prison.

• If you both confess, you each receive a sentence of 8 years in prison.

• [If you both remain silent, you each receive a sentence of 1 year in prison (on the weapons charge).]

A game is any interaction with:

• At least two players (and a player can be an individual or entity);

• Each player has a number of possible strategies (or courses of action) to follow;

• The strategies chosen by each player determine the outcome of the game; and

• Numerical payoffs can be associated with the different game outcomes.

Game theory is a mathematical technique used to analyze the behavior of individuals as they:

• Try to reach an optimal outcome through game playing and/or the use of strategic behavior;

• Are fully aware of the interactive nature of the process/game; and

• Anticipate the moves of other players.

Like individuals, firms have a bias against cooperation:

• Even though cooperation (via a cartel aimed at raising prices) would increase profits; and

• Each firm has an incentive to cheat.

When an oligopoly dominates a market:

• Production is too low;

• Prices are too high; and

• Optimal public policy includes promoting competition and preventing price fixing.