PRISONER’S DILEMMA & COLLUSIVE OLIGOPOLIES A2 Economics

Starter: Banking Sector

Aims and Objectives Aim: To understand the prisoner’s dilemma and collusion in an oligopoly. Objectives: Discuss the oligopolistic banking sector. Analyse and apply the prisoner’s dilemma model. Evaluate the reasoning behind a collusive oligopoly.

Prisoner’s Dilemma in the Mobile Phone Industry Read the case study. Create your own pay off matrix from the case study. Discussion

Prisoner’s Dilemma in the Mobile Phone Industry Firm A: ………… Firm B: ……………

Collusion in an Oligopoly Game theory suggests that sometimes, firms would be better off if they colluded, rather than competed interdependently. Colluding limits possibilities of choosing the wrong strategies. Supermarkets Article.

Formal Collusion An agreement exists between firms about price or output policies. Range from restrictive agreements refusing to supply outlets which sold below the agreed price, to.. …agreeing to raise or set prices together. Overall aim is to joint profit maximise & remove uncertainty.

Formal Collusion: Cartel Cartel: group of firms colluding. Firm A Firm B Firm C Firm D Firm E Members of the Cartel Least productively efficient or highest cost firm. PRICE RING

Formal Collusion: Cartel 5 firms jointly agree to charge a price to keep firm E in the market (least efficient firm). Why? In a competitive market firm E would have to reduce costs or go out of business. Cartel agreements allow inefficient firms to stay in business and more efficient firms to enjoy supernormal profits.

Cartels: Supernormal Profit Diagram Draw (D=AR) = MR = MC Supernormal profits in a colluding oligopoly.

Formal Collusion: Cartel Cartels can achieve a better outcome for all firms concerned. However they are not likely to be good for consumers. Higher prices and restriction of choice. Cartels tend be illegal due to their anti competitive nature

Formal Collusion: Legal Cartels Joint product development Such as Ford Galaxy, Seat Alhambra, VW Sharan which were jointly developed by VW and Ford. Improved health and safety and product and labour standards in the industry.

Plenary Draw the cartel supernormal profits diagram. Explain the benefits and disadvantages of cartels.