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Prisoner’s Dilemma & Collusive Oligopolies

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.

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Prisoner’s Dilemma & Collusive Oligopolies

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  1. Prisoner’s Dilemma & Collusive Oligopolies A2 Economics

  2. Starter: Banking Sector

  3. 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.

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

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

  6. 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.

  7. 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.

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

  9. 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.

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

  11. 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

  12. 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.

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

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