Cartels: Collusion Class 8 Industrial Economics 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 The Prisoners’ Dilemma Revisited Tit for tat Present Value and Discounting Trigger Price Strategy Collusive Agreements Contents

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

Tit for Tat Strategy Round GE WH GE WH 80,80 120, 25 25,120 100,100 Start the first round cooperating In every subsequent round, adopt your opponent’s action in the previous round. Round GE (Act-Payoff) WH 1 Collude (25) Defect (80) 2 3 Collude(25) … Collude ( ) 80,80 120, 25 25,120 100,100 GE Collude Defect WH The Prisoners Dilemma

Tit for Tat vs. Dominant Strategy Round GE (Tit for Tat) WH (Dominant Strategy) 1 Collude (25) Defect (80) 2 3 … 200 Tot. Profit GE: 15,945 16,040 Tit for Tat

Tit for Tat vs. Tit for Tat Round GE (Tit for Tat) WH 1 Collude (100) 2 3 … 200 Tot. Profit GE: 20,000 20,000 Tit for Tat

Dominant vs. Dominant Round GE WH (Tit for Tat) 1 Defect (80) 2 3 … 200 Tot. Profit GE: 16,000 16,000 In Tit for Tat context…

Tit for Tat with Uncertainty Round GE (Tit for Tat) WH (Tit for Tat) 1 Collude (100) 2 3 Nature: defect (120) Collude (25) 4 Defect (120) 5 6 7 8 Defect (80) 9 Nature: defect (80) 10 11 … 200 Tot. Profit GE: 15,995 15,995 In Tit for Tat context…

Tit for Tat Nice with Uncertainty Round GE (Tit for Tat) WH (Tit for Tat) 1 Collude (100) 2 3 Nature: defect (120) Collude (25) 4 5 6 7 8 9 Nature: defect (80) 10 11 … 200 Tot. Profit GE: 19,945 19,945 In Tit for Tat context…

Trigger Price 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 Trigger Strategy

Net Present Value The Concept Trigger Strategy

Net Present Value The Formula Trigger Strategy

Collusive Agreement as Viewed By One Firm Cartel $ Q Collusion

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

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