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A prisoner’s dilemma for oligopolists
Firm B
Hold Down Output (cooperate with other firm) Increase Output (do not cooperate with other firm)
Firm A Hold Down Output (cooperate with other firm) A gets $1,000, B gets $1,000 A gets $200, B gets $1,500
Increase Output (do not cooperate with other firm) A gets $1,500, B gets $200 A gets $400, B gets $400

Can the two firms trust each other? Consider the situation of Firm A:

  • If A thinks that B will cheat on their agreement and increase output, then A will increase output, too, because for A the profit of $400 when both firms increase output (the bottom right-hand choice in [link] ) is better than a profit of only $200 if A keeps output low and B raises output (the upper right-hand choice in the table).
  • If A thinks that B will cooperate by holding down output, then A may seize the opportunity to earn higher profits by raising output. After all, if B is going to hold down output, then A can earn $1,500 in profits by expanding output (the bottom left-hand choice in the table) compared with only $1,000 by holding down output as well (the upper left-hand choice in the table).

Thus, firm A will reason that it makes sense to expand output if B holds down output and that it also makes sense to expand output if B raises output. Again, B faces a parallel set of decisions.

The result of this prisoner’s dilemma is often that even though A and B could make the highest combined profits by cooperating in producing a lower level of output and acting like a monopolist, the two firms may well end up in a situation where they each increase output and earn only $400 each in profits . The following Clear It Up feature discusses one cartel scandal in particular.

What is the lysine cartel?

Lysine, a $600 million-a-year industry, is an amino acid used by farmers as a feed additive to ensure the proper growth of swine and poultry. The primary U.S. producer of lysine is Archer Daniels Midland (ADM), but several other large European and Japanese firms are also in this market. For a time in the first half of the 1990s, the world’s major lysine producers met together in hotel conference rooms and decided exactly how much each firm would sell and what it would charge. The U.S. Federal Bureau of Investigation (FBI), however, had learned of the cartel and placed wire taps on a number of their phone calls and meetings.

From FBI surveillance tapes, following is a comment that Terry Wilson, president of the corn processing division at ADM, made to the other lysine producers at a 1994 meeting in Mona, Hawaii:

I wanna go back and I wanna say something very simple. If we’re going to trust each other, okay, and if I’m assured that I’m gonna get 67,000 tons by the year’s end, we’re gonna sell it at the prices we agreed to . . . The only thing we need to talk about there because we are gonna get manipulated by these [expletive] buyers—they can be smarter than us if we let them be smarter. . . . They [the customers]are not your friend. They are not my friend. And we gotta have ‘em, but they are not my friends. You are my friend. I wanna be closer to you than I am to any customer. Cause you can make us ... money. ... And all I wanna tell you again is let’s—let’s put the prices on the board. Let’s all agree that’s what we’re gonna do and then walk out of here and do it.

The price of lysine doubled while the cartel was in effect. Confronted by the FBI tapes, Archer Daniels Midland pled guilty in 1996 and paid a fine of $100 million. A number of top executives, both at ADM and other firms, later paid fines of up to $350,000 and were sentenced to 24–30 months in prison.

In another one of the FBI recordings, the president of Archer Daniels Midland told an executive from another competing firm that ADM had a slogan that, in his words, had “penetrated the whole company.” The company president stated the slogan this way: “Our competitors are our friends. Our customers are the enemy.” That slogan could stand as the motto of cartels everywhere.

Questions & Answers

what is production
Imoro Reply
what is a monopolistic competition?
moniman Reply
who is barter
Tening Reply
exchange goods each other
what is economic
is the use of scares resources to satisfy our unlimited needs and wants
how many kinds of utility functions?
What is partnership?
the legal association of two or more people as co-owners of a business for profit.
Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different product?
James Reply
what is supply
Mizta Reply
what is opportunity cost
The opportunity gained interms of opportunity lost is known as opportunity cost Or The second best alternative use of resources
forgone alternative: like forgoing Something our of two to buy one
what is macro economic s
Addo Reply
macroeconomics is the study of economic as a whole level.
meaning of positive science
Sumit Reply
positive science it is focused on facts and cause and effect and behavioural relationship and include developmental testing in economic theoreis.
what is inflation
Sama Reply
inflation is the general price increase of goods and services in an economy.
Inflation is the persistent rise in the general price level
inflation is characterized by increase in the general price of goods and services. when there is too much money in circulation. increase in demand of goods pursuing fewer goods. when purchasing power of money decreases .
inflation is the persistent rise general price level
inflation is the persistent increase in price
how are you
increase in the general level of price...
what is deflation
is the gradual decrease of currency exchange in a country.
why ecnomics important ? give answer plz
Because is a field of science study that reflects on our day to day activities with human behavior.
why economic is a science
Economics is referred to as a social science not a pure science. It's regarded as a social science because it makes use of the scientific method to solve problems. The scientific method refers to observation, asking questions, forming hypothesis, experimentation etc
Economics is a social science because it study human behavior how he relates with his daily activities with the available limited resources to satisfy his wants.
what are the factors affecting the demand
yeah it uses the scientific method to study human behaviour.
inflation referes to the persistant increase in the general price of goods and services over a given period of time say a year.
factors affacting Demand of good and services are 1.price of a commodity in question 2.price of related commodity 3.Income of a consumer 4.Population 5.tast and prefereance 6.Season or weather condition
what is difference between perfect and non perfect market.
different between demand and quantity demand
Farhan Reply
No difference
demand is the overall demand for it
actually theres no difference
quantity demanded is used in Equilibrium of d and s
for evrything else u use deman
the difference of it is that when demand simply denotes the willingness and a person's ability to purchase. And as against quantity demand represent the amount of an economic good or services desire by a consumer at a fixed price .☺
how to calculate inflation
Richard Reply
Explain the factors that have led to high quantity demanded
Ogwang Reply
price of the product increase of price substitute product as people shift to cheap one
what are the methods used by trade union to increase wages of their members?
Black Reply
the size of the commodity
increase demand of labour decrease supply of labour
I do support your answer Jackel.
but how do they do it?
by increasing more labour and reduced the suppliers
they can not increase labour, they increase demand of labour.
how do they increase demand for labor?
by analyzing the market equilibrium , cost reduction and cost control , savings in time .
decreasing supply of labour are achieved through training and certification that require for you to employed, you must have certificate, also trade union encouraged government to restrict migration into the country causing shortage of labour supply. Note that the aim of union is to enhance life
objective of union: better working conditions, liveable wage, protect member from unfair treatment which are done through negotiations betweens representative and management. known as collective bargaining.
what is the nature of economics?
Tyscar Reply
economics is a social science since it seeks to solve social problem of scarcity
main concerns is the decision individuals make on the allocation of scarce resources among the competing wants
in the short run firm produce a positive as long as the price is larger than what?
yoel Reply
what is economic
Bah Reply
economics is the study of managing the resources in order to maximize the needs and satisfy the wants to a great extent in a regulated set-up..
One explanation for deviation when there is no impact on balance of trade
economic s is a social science that deals with human behavior as a relationship between ends and scarce means which has alternative uses
economic is a study of mankind in ordinary business of life
economics it is the study of social science that deals with human behaviour as relationship between ends and scarce means which have alternative uses
Economic is the use of scarce recourses to attain economic dough effectively and efficiently.
economics is the study of how humans make decisions in the face of scarcity. Eg. family decision, individual decision, and societal decision.

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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