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Cartels: Collusion

Cartels: Collusion. Class 8 Ref: Collusion: The Great Prisoners’ Dilemma. Chapter 8. Industrial Organization – Theory & Practice. Second Edition. Waldman – Jensen. Addison Wesley. pp. 228–252 Industrial Economics Flavio Pinto. Contents. Contents. The Prisoners’ Dilemma Revisited

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Cartels: Collusion

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  1. Cartels:Collusion Class 8 Ref: Collusion: The Great Prisoners’ Dilemma. Chapter 8. Industrial Organization – Theory & Practice. Second Edition. Waldman – Jensen. Addison Wesley. pp. 228–252 Industrial Economics Flavio Pinto

  2. Contents Contents • The Prisoners’ Dilemma Revisited • Tit for tat • Present Value and Discounting • Trigger Price Strategy • Collusive Agreements

  3. Westing House Defect Collude 100,100 25,120 Collude General Electric 120, 25 80,80 Defect The Prisoners Dilemma The Prisoners Dilemma • The Game

  4. Tit for Tat Strategy WH Defect Collude Collude GE Defect 100,100 25,120 120, 25 80,80 The Prisoners Dilemma • Start the first round cooperating • In every subsequent round, adopt your opponent’s action in the previous round.

  5. Tit for Tat vs. Dominant Strategy Tit for Tat

  6. Tit for Tat vs. Tit for Tat Tit for Tat

  7. Dominant vs. Dominant In Tit for Tat context…

  8. Tit for Tat with Uncertainty In Tit for Tat context…

  9. Tit for Tat Nice with Uncertainty In Tit for Tat context…

  10. Trigger Price Strategy Trigger Strategy • Start the first round cooperating and charging the joint-profit maximizing price P= 55. • Continue to charge the joint-profit maximizing price P = 55 unless the other player lowers price below P = 55, in which case charge the Equilibrium price P = 10 forever

  11. Net Present Value Trigger Strategy • The Concept

  12. Net Present Value Trigger Strategy • The Formula

  13. Collusive Agreement as Viewed By One Firm Cartel $ Q Collusion

  14. Factors Factors Affecting Collusion • Number of Firms • Concentration • Rate of Technological Change • Demand Growth and Elasticity • Frequency of Sales

  15. Exercises Practical Problems • Please, solve problems 1, 2, 3 and 4 (pp. 249-250)

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