PRISONERS DILEMMA COLLUSIVE OLIGOPOLIES A 2 Economics Starter

PRISONER’S DILEMMA & COLLUSIVE OLIGOPOLIES A 2 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. • Evaluate the reasoning behind a collusive oligopoly.

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 Industry Firm B: …………… Firm A: …………

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

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 • Draw • (D=AR) = MR = MC • Supernormal profits in a colluding oligopoly.

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