---
title: "Side Payment — AP Micro Definition & Game Theory Guide"
description: "A side payment is a transfer between players that changes a game's payoffs to induce cooperation. Key for AP Micro Topic 4.5 calculations on dominant strategies."
canonical: "https://fiveable.me/ap-micro/key-terms/side-payment"
type: "key-term"
subject: "AP Microeconomics"
unit: "Unit 4"
---

# Side Payment — AP Micro Definition & Game Theory Guide

## Definition

In AP Microeconomics, a side payment is a transfer of money from one player in a game to another, made to change the receiver's payoffs so they switch strategies. It works when the payment is large enough to offset what the receiver gives up by cooperating, a core calculation in Topic 4.5 game theory.

## What It Is

A side payment is a bribe with better PR. In [game](/ap-micro/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe "fv-autolink") theory, it's money (or anything of value) one player hands another to change the [payoff](/ap-micro/key-terms/payoff "fv-autolink") structure of the game. The goal is to make the receiver's "cooperate" payoff bigger than their "defect" payoff, so they willingly switch strategies.

Here's the logic you need for the exam. Suppose Firm B earns $50 by entering a market and $30 by staying out. Staying out costs B $20, so any side payment from Firm A worth more than $20 flips B's best choice to staying out. Meanwhile, Firm A only offers the payment if keeping B out raises A's [profit](/ap-micro/unit-3/types-profit/study-guide/vxIdLwjPGUkDbcjELR2d "fv-autolink") by more than the payment costs. A deal exists when the payer's gain from changing the outcome exceeds the receiver's loss from switching. That gap between "minimum the receiver accepts" and "maximum the payer offers" is exactly what AP questions ask you to compute from a payoff matrix.

## Why It Matters

Side payments live in Topic 4.5 (Oligopoly and Game Theory) in [Unit 4](/ap-micro/unit-4 "fv-autolink"): Imperfect Competition. They're the heart of learning objective [AP Micro](/ap-micro "fv-autolink") 4.5.C, which asks you to calculate the incentive sufficient to alter a player's dominant strategy. That "incentive" is usually a side payment. The concept also connects to EK PRD-3.C.2, the idea that oligopoly firms have an incentive to collude. Side payments are one mechanism that makes collusion happen, because a firm that would otherwise cheat or enter a market can be paid to play along. If you can read a payoff matrix and find each player's dominant strategy, the side payment question is just one subtraction away.

## Connections

### [Dominant strategy (Unit 4)](/ap-micro/key-terms/dominant-strategy)

A side payment exists to defeat a [dominant strategy](/ap-micro/key-terms/dominant-strategy "fv-autolink"). If a player's best move is the same no matter what the other player does, the only way to change their behavior is to change their payoffs, and that's what the payment does. The minimum payment equals the payoff gap between the dominant strategy and the action you want them to take.

### [Collusion (Unit 4)](/ap-micro/key-terms/collusion)

[Collusion](/ap-micro/key-terms/collusion "fv-autolink") is the agreement; a side payment is often the glue. Cartel deals collapse because each firm is tempted to cheat for higher individual profit. A side payment can close that temptation gap by compensating the would-be cheater for cooperating.

### [Prisoner's Dilemma (Unit 4)](/ap-micro/key-terms/prisoners-dilemma)

The [Prisoner's Dilemma](/ap-micro/key-terms/prisoners-dilemma "fv-autolink") is the classic setup where both players defect even though mutual cooperation pays more. A side payment is a way out of the dilemma. If one player transfers enough of their cooperation gains to the other, defecting stops being the best response.

### [Payoff (Unit 4)](/ap-micro/key-terms/payoff)

Side payment problems are really payoff-matrix arithmetic. You compare a player's payoff in two cells, find the difference, and that difference is the threshold payment. Read the matrix carefully, because the most common error is comparing the wrong cells.

## On the AP Exam

Side payments show up as calculation questions tied to a payoff matrix or game tree. The 2019 FRQ Q3 is the model case. Patrick's Pie (an incumbent that can advertise or not) faces Dee's Pizzeria (a potential entrant), and the question hinges on payoffs from each combination of choices, including how much one firm would pay or sacrifice to change the other's behavior. On MCQs and FRQs, expect prompts like "what is the minimum payment Firm A must offer Firm B so that B stays out of the market?" Your job is to (1) find the receiver's payoff from their current best action, (2) find their payoff from the action the payer wants, and (3) subtract. Then check feasibility by confirming the payer gains more than the payment costs. Show the subtraction explicitly on FRQs, since the math is the point being graded.

## side payment vs collusion

Collusion is the agreement between oligopoly firms to act together (like fixing prices or splitting a market). A side payment is a specific tool, a cash transfer that makes one party willing to honor that agreement. You can have collusion without side payments, and a side payment can also appear outside collusion, like an incumbent paying a rival to stay out of a market entirely. Think of collusion as the deal and the side payment as the price of the deal.

## Key Takeaways

- A side payment is a transfer from one player to another that changes the payoffs in a game so the receiver switches to the strategy the payer wants.
- The minimum acceptable side payment equals the payoff the receiver gives up by switching strategies, so anything larger than that gap works.
- A side payment deal is only feasible when the payer's gain from the new outcome is larger than the payment itself.
- Side payments are the standard way to alter a dominant strategy, which is exactly what learning objective AP Micro 4.5.C asks you to calculate.
- On FRQs like 2019 Q3, always show your work by subtracting the two relevant payoffs from the matrix rather than just stating a number.

## FAQs

### What is a side payment in AP Microeconomics?

It's a transfer of money from one player in a game to another, made to change the receiver's payoffs so they choose a different strategy. It appears in Topic 4.5 (Oligopoly and Game Theory) and is tested through payoff matrix calculations.

### How do you calculate the minimum side payment?

Find the receiver's payoff from their current best strategy, find their payoff from the strategy you want them to play, and subtract. If staying out of a market pays a firm $30 but entering pays $50, the minimum side payment to keep them out is anything greater than $20.

### Is a side payment the same thing as collusion?

No. Collusion is the agreement between firms to act jointly, while a side payment is a specific cash transfer that makes the agreement worth honoring. A side payment can also happen outside collusion, like an incumbent firm paying a potential entrant to stay out.

### Do side payments guarantee that collusion holds together?

No. A side payment only works if it's at least as large as the receiver's gain from defecting, and even then the agreement isn't legally enforceable, so the cheating temptation never fully disappears. The AP exam tests whether you can compute the threshold, not whether the deal is stable forever.

### Has the AP Micro exam asked about side payments on an FRQ?

Yes. The 2019 FRQ Q3 used an entry game between Patrick's Pie and Dee's Pizzeria, the classic setting where you calculate how much one firm would pay or give up to change the other firm's choice. Expect to pull numbers straight from a payoff matrix and subtract.

## Related Study Guides

- [4.5 Oligopoly and Game Theory](/ap-micro/unit-4/oligopoly-game-theory/study-guide/mBvl1ZO2oahFuA0W4Zfe)

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