1. 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

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

3. 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

4. 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

5. 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

6. 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

7. 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…

8. 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…

9. 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…

10. 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

11. Net Present Value
The Concept
Trigger Strategy

12. Net Present Value
The Formula
Trigger Strategy

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

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

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