142_5 - Cartels More likely to occur when only a few firms...

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Villas-Boas- Lecture 5 EEP142 Page 0 Cartels More likely to occur when only a few firms => in an oligopoly There are two kinds of oligopolies we will study: Cooperative oligopolies in which a small number of firms coordinate their efforts to maximize joint cartel profits – today’s lecture. Non-cooperative oligopolies in which the firms act as rivals – next couple of lectures. • If they decide independently to behave as if they have a cartel arrangement this is called tacit collusion
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Villas-Boas- Lecture 5 EEP142 Page 1 Cartels • Cartel members benefit from coordinating their decisions by restricting output and therefore increasing price BUT • Each cartel member has incentives to cheat on the agreement by increasing output. • Some cartels tend to break apart even without government intervention. • Are the cartels we know of the “unsuccessful” ones or the “unlucky” ones?
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Villas-Boas- Lecture 5 EEP142 Page 2 Collusion Experiment Isn’t he verbal agreement enough among cartel members? We are now 3 firms part of the EEP cartel and each of us has to choose between two options X and Y. Here are the payoffs given our choices: # who chose X 0 1 2 3 X 0 20 40 60 Y 25 35 45 - EEP profits 75 90 125 180
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EEP142 Page 3 Collusion Experiment How would you choose now? Does the cartel maximize joint profits? How could the cartel reach agreement that all choose X?
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142_5 - Cartels More likely to occur when only a few firms...

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