Eco 11-12 - “cheats” 2 Collusion a If the industry...

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Econ Notes 11/12/07 1. Prisoners Dilemma a. 2 people rob a bank i. 4 options 1. Both rat out the other a. Both get full sentence 2. Person A rats out Person B a. A get’s short sentence, B gets full sentence 3. Person B rats out Person A a. B get’s short sentence, A gets full sentence 4. Neither rat’s the other out a. Both go free ii. The intersection of both the 2 people’s “best choices” because each person will make the choice that is best for themselves. iii. Desire to cooperate/coordinate actions 1. Can typically come about in repeated “games” 2. If both groups cooperate, both can gain higher pay a. Cooperation only works if there are negative repercussions iv. Attempt to coordinate action: “tit for tat” 1. Attempting to coordinate action through a threat 2. Adopt strategy that is in the collective interest until the other party
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Unformatted text preview: “cheats” 2. Collusion a. If the industry collectively decides to set output below equilibrium, they can force the price up b. If the industry decides to set output below equilibrium, it would be in one person’s best interest to set output above equilibrium c. Everyone has the incentive to defect d. Economists are suspicious of these deals i. The conditions for “effective collusion” are limited 1. Entry into industry is costly 2. Homogeneous Products 3. Inelastic Demand 3. (Read book over collusion) 4. Property Rights & Transaction Costs (Economic Organization) a. Information is costly i. Pricing mechanism is not free and it is costly b. Coase i. The Problem of Central Cost Payoff Matrix Person A Person B Silent Confesses Silent-1,-1-9,0 Confesses 0,-9-6,-6...
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