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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

can someone explain cardinal and ordinal utility for me please?
faith Reply
sir please explain industrial economist and its important
Priya
Please how can someone maximise profit in business?
Esther
how to calculate profit maximization
Daudi Reply
what is fiscal policy
Adewale Reply
it is the government policy in which uses expenditures and taxes to regurate the economy by applying either contractionary or expansionary FISCAL policy
Marcus
Hello. Please explain shortly
nourhan Reply
what happens when maximum price is placed above equilibrium price
Christian Reply
the demand curve falls
Ewerton
there will be excess supply
Emmanuel
explain the term : law of demand and it's function
Evacon Reply
law of demand state that the higher the price the lower the quantity demanded and vice versa
Moka
Está correto, sua função também é a de estabilizar o mercado do produto em questão, seu preço, sua produção, etc.
Ewerton
higher******
Umar
what are raw materials
Fatmah Reply
the basic material from which a product is made. "these could be used as raw material"
ADAMU
fatmah raw material, also known as a feedstock, oky is a basic material that is used to produce goods, finished products, energy, or intermediate materials that are feedstock for future finished products. just to make outputs.
ADAMU
oh yeah I got it .. thank you for your help 😊
Fatmah
hello my dear friends
Au
hello
Fatmah
hello
Muhammad
hy
Sortema
Any notes on ppf.?
George
can anyone clarify features of internal efficiency with reference to education
Sortema
raw material can also be said to be organic materials that haven't gone through any form of processing.
faith
in an open economy, the GDP is measured as ?
jacobs Reply
what is Labour of supply.
Eshmel Reply
it is called supply of labour
Emmanuel
it is the total number of those the producer is expected to employ at a given time and at an existing wage rate
Emmanuel
it is a sum number of employees the manufacturer wish to employ in a period of time , and at a given wage rate
Evacon
if the price of yam increases what will happen to demand curve?
Lawal Reply
the demand curve will decrease
Fatmah
with table and diagrametic illustration
Usama Reply
ok
Mustafe
if the price elasticity of demand for a commodity is zero the demand curve is
Aryan Reply
the demand curve is inelastic
Emmanuel
this is because price bring about a lesser change in quantity demanded
Emmanuel
how are we going to draw scale of preference
Achor Reply
how do we identify choice
Achor
how do we identify opportunity cost
Achor
opportunity cost is the forgone alternative. in oder words, it is the sacrificed goods or service for another. thus, the item you did not buy with the resources you have thereby buying another one is called opportunity cost. thanks
John
Opportunity cost considers only the next best alternative to an action, not the entire set of alternatives, and takes into account all of the differences between the two choices.
ADAMU
IAC curve is geueraly
Subham Reply
what are the benefits or tourism?
Maake Reply

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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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