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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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Presentation Transcript
aims and objectives
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
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 industry1
Prisoner’s Dilemma in the Mobile Phone Industry

Firm A: …………

Firm B: ……………

collusion in an oligopoly
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
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
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

formal collusion cartel1
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
Cartels: Supernormal Profit Diagram
  • Draw
  • (D=AR) = MR = MC
  • Supernormal profits in a colluding oligopoly.
formal collusion cartel2
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
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
Plenary
  • Draw the cartel supernormal profits diagram.
  • Explain the benefits and disadvantages of cartels.