A cartel is a group of suppliers that colludes to operate like a monopolist.
Collusion is an explicit or implicit agreement to avoid competition with a view to increasing profit.
A conjecture is a belief that one firm forms about the strategic reaction of another competing firm.
A game is a situation in which contestants plan strategically to maximize their profits, taking account of rivals’ behaviour.
A strategy is a game plan describing how a player acts, or moves, in each possible situation.
A Nash equilibrium is one in which each player chooses the best strategy, given the strategies chosen by the other player, and there is no incentive for any player to move.
A dominant strategy is a player’s best strategy, whatever the strategies adopted by rivals.
A payoff matrix defines the rewards to each player resulting from particular choices.
A binding commitment is an agreement, entered into voluntarily, that restricts future actions.
A credible threat is one that, after the fact, is still optimal to carry out.
Oligopoly Problem: Conjectural Interdependence
- Collusive Arrangements
- Game Theory
Collusion: Three tasks
- Find the optimal Pfix (P*fix <= Pm)
- Devise some quota mechnism (Qfix < Qc)
3. Policing Mechanism
– Detect cheaters
– Deter cheaters
- Cooperative games: players can sign binding contracts
- Non-cooperative games: players cannot sign binding contracts
- Extensive form games: sequential play game (tree diagrams) Ex – Chess
- Normal form games: simultaneous play game Ex – prisoner’s dilemma
Nash Equilibrium is a great predictor of how people behave.