2.1 Theories
2.1.1   Duopoly Market-Antoine Augustin Cournot (1838)
Duopoly theory examines the interaction of two firms in a market which works in producing a homogeneous product. Each firm's output and prices are determined by the decisions of the other. Each producer is conscious that his rival's quantity decision will also impact the price he faces and thus his profits. Consequently, each producer chooses a quantity that maximizes his profits subject to the quantity reactions of his rival.
2.1.2 Prisoner’s Dilemma Game Theory- Merrill Flood and Melvin Dresher (1950)
Game theory:   the study of how people behave in strategic situations, which mean a situation in which each person, when deciding what actions to take, must consider how others might respond to that action. As the number of firms is small, each firm must act strategically. (Mankiw, et. Al Principles of Economy) A particular important game is called the Prisoner’s dilemma. The “dilemma” faced by the prisoners here is that, whatever the other does, each is better off confessing than remaining silent. But the outcome obtained when both confess is worse for each than the outcome they would have obtained had both remained silent. A common view is that the puzzle illustrates a conflict between individual and group rationality, especially in the duopoly market. In duopoly market, each company has an incentive to cheat. Just as self interest drives the prisoners in the prisoners’ dilemma to confess, self interest makes it difficult for the duopoly to maintain the cooperative outcome with low production, high prices, and monopoly profit.
In Prisoner’s dillema, there is a matrix of 2 x2 called “Pay off Matrix” . It is a table that shows the payoffs for each player for every possible combination of actions by the players. The game’s...