cartel & prisoners dilema

8/9/2019 Cartel & Prisoners Dilema

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Oligopoly market form is probably of greatest importance intodays economy. However, it is most complex markets onaccount of price indeterminateness & absence of well definedspecified goals.

Interdependence of firms, uncertainty about rivals policy andskepticism about the profit maximizing goal make it impossible toarrive at a determinate price-output solution under oligopoly.

Firms can not apply marginalist principle MC = MR for profitmaximization.

Thus,uncertainity about reaction patterns poses a serious difficultyin providing a single determinate solution


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Means that the firms co-operate witheach other in taking joint actions to keeptheir bargaining position stronger against

the consumer.

PRICING UNDER PERFECT COLLUSION :-


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An explicit agreement among independentfirms on subjects like prices, output, marketsharing, etc.

Desire of the firms to have joint profits.

Short-term phenomenon.

Two types:-

1. Centralized cartel

2. Market-sharing cartel


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An arrangement where the firms in an industry reach anagreement which maximises joint profits.

Market demand for the product is the cartels demand.

The output of the cartel is shared between firms on the

basis of efficiency of the firms.

Model of centralized cartel :


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MC

AR is the demand curve and

MR is the corresponding

marginal revenue.

Profitable output is where

MR= sum(MC)

Optimum level of output isOX.

AR=D

MR

O

Revenue,cost(rs.)

Units of output

P

E


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Firms in the industry produce homogeneousproducts and agree upon the share each firm

have.

Each firm sells at the same price but sellswithin a given region.


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Assume that two firms having identical costs

agree to share the market half and half. Firms sells equal amount of output at equal

price.

Following graph shows:-

demand curve for the industry = DD

demand curve for each firm = dd

marginal revenue curve = MR

profit maximizing output = Ox

total output of the industry = 2 * Ox


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price charged by the firms = OP

per unit profit earned by each firm = PC

D

D

d

d

MC

AC

P

C

O

EMR

x

Revenue,cost(rs.)

Units of output


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Prisoners

Dilemma


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Let us suppose that there are two persons,A and B, who are partners in an illegal

activity of match fixing. The CBI arrests A

and B, on suspicion of their involvement in

fixing cricket matches. They are arrestedand lodged in separate jails with no

possibility of communication between

them.


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They are being interrogated separately by the CBIofficials with following conditions disclosed to

them in isolation.

(1) If you confess your involvement in match fixing,you will get a 5-year imprisonment.

(2) If you deny your involvement & your partnersdenied it too, you will be set free for lack ofevidence.

(3) If one of you confesses and turns approver, and

the other does not, then one who confesses gets2-year imprisonment, and one who does notconfess gets 10 year imprisonment.


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Given the conditions aforesaid, each suspect has twooptions open to him :

(a) to confess

(b) not to confess

While taking decision, both have common objective i.e. tominimize the period of imprisonment.

Given the above objective, both of them deny theirinvolvement in match fixing.

But, there is no certainty that if one denies his involvement,

the other will also deny

the other one may confess and turnapprover. With this uncertainty, the dilemma in makingchoice still remains.


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The problem of their decision making can bedepicted through Pay off matrix :

A B A B

5 5 2 10

10 2 0 0

Confess

Deny

As option

Confess DenyBs option


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Given the conditions, it is most likely that both the suspectsmay opt for confession, as both of them are unsure of each

other conduct.

If both confess, each of them will get 5 year term jail. This istheir 2nd best option.

For his decision for confession A might formulate hisstrategy in manner:

If A confesses then imprisonment of 5 years, but if deniedand B confesses and turn approver then there is chance of10 years imprisonment. This would be the worst scenario..

It is most likely that B reasons out the case in same manner.

If they both confess, they would avoid 10 yearsimprisonment, the max. possible jail sentence under the law.This is the best they could achieve in given conditions.


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The prisoners dilemma illustrates the nature ofproblems oligopoly firms are confronted with in

formulation of their business strategy.

Strategy like ad-expenditure, price cuttingrequires a reasonable justification the firm willhave to anticipate actions, reactions and counteractions by rival firms and chalk out its own

strategy.

In case of such problems, the case of prisonersdilemma becomes an illustrative example


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THANK

YOU !!!

cartel & prisoners dilema

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