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How to enforce cooperation

How can parties who find themselves in a prisoner’s dilemma situation avoid the undesired outcome and cooperate with each other? The way out of a prisoner’s dilemma is to find a way to penalize those who do not cooperate.

Perhaps the easiest approach for colluding oligopolists, as you might imagine, would be to sign a contract with each other that they will hold output low and keep prices high. If a group of U.S. companies signed such a contract, however, it would be illegal. Certain international organizations, like the nations that are members of the Organization of Petroleum Exporting Countries (OPEC) , have signed international agreements to act like a monopoly, hold down output, and keep prices high so that all of the countries can make high profits from oil exports. Such agreements, however, because they fall in a gray area of international law, are not legally enforceable. If Nigeria, for example, decides to start cutting prices and selling more oil, Saudi Arabia cannot sue Nigeria in court and force it to stop.

Visit the Organization of the Petroleum Exporting Countries website and learn more about its history and how it defines itself.

Because oligopolists cannot sign a legally enforceable contract to act like a monopoly, the firms may instead keep close tabs on what other firms are producing and charging. Alternatively, oligopolists may choose to act in a way that generates pressure on each firm to stick to its agreed quantity of output.

One example of the pressure these firms can exert on one another is the kinked demand curve    , in which competing oligopoly firms commit to match price cuts, but not price increases. This situation is shown in [link] . Say that an oligopoly airline has agreed with the rest of a cartel to provide a quantity of 10,000 seats on the New York to Los Angeles route, at a price of $500. This choice defines the kink in the firm’s perceived demand curve. The reason that the firm faces a kink in its demand curve is because of how the other oligopolists react to changes in the firm’s price. If the oligopoly decides to produce more and cut its price, the other members of the cartel will immediately match any price cuts—and therefore, a lower price brings very little increase in quantity sold.

If one firm    cuts its price to $300, it will be able to sell only 11,000 seats. However, if the airline seeks to raise prices, the other oligopolists will not raise their prices, and so the firm that raised prices will lose a considerable share of sales. For example, if the firm raises its price to $550, its sales drop to 5,000 seats sold. Thus, if oligopolists always match price cuts by other firms in the cartel, but do not match price increases, then none of the oligopolists will have a strong incentive to change prices, since the potential gains are minimal. This strategy can work like a silent form of cooperation, in which the cartel successfully manages to hold down output, increase price    , and share a monopoly level of profits even without any legally enforceable agreement.

Questions & Answers

what is economic
Charles Reply
what are the type of economic
Charles
macroeconomics,microeconomics,positive economics and negative economics
Gladys
what are the factors of production
Gladys
process of production
Mutia
how will a country's population be equal to it's labour force
Hope Reply
what is the meaning of ppf
Obeng Reply
What is Economic
Governor Reply
economic
Nwosu
Economics is the social science that deals with the unlimited human wants in the face of scarce (limited in supply) resources.
Azka
what is market
Gift Reply
marker is the interaction of buying and selling
David
market refers to the interaction of the processes of buying and selling of commodities between the buyer and the seller.
stephen
market is a place where two parties gather to facilitate exchange of goods and services.
Yhaar
what are some good sources of information to find trends in various Industries
James
how do on know that marketing is going on
Mutia
what is consumption
Raj
Using revenue
Prince
What is stock market
Prince
What are the marmet function
Odirile Reply
price elasticity of demand is the degree of responsiveness of a quantity demanded to the change in price of the commodity in question.
Gladys Reply
What does elasticity mean
Prince
Elasticity means change in demand with the change in price. It is elastic if the demand changes with the price change whereas it is inelastic if the demand is not affected due to change in price
Devesh
Okay
Olatunde
meaning
KP
okay
Binta
I have a question
Binta
what is the importance of learning economics?
Thelma Reply
it helps to make the correct choice
Gladys
it helps firm to produce products that will bring more profit
Gladys
the difference between needs and wants
londiwe Reply
needs are things that we basically can't live without wants are just luxury things
Thelma
needs are things without them we can't live but want are things without we can live
KP
what is education
KP
it's a process in which we give or receiving methodical instructions
Thelma
what is mixed economy
Amex
what is a deadweight loss? how monopoly creates a deadweight loss?
Ashraf Reply
who are u?
Lamine
haha
Cleaford
scarm
nura
what it this
Cleaford
hi y'all
Dope
how does group chat help y'all 🤔
Dope
hi y'all
Dope
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Dope
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Dope
to learn from one another
Lamine
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Dope
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Creative
Yes
Lamine
what is type of economic
taiwo Reply
how to understand basics of economics
Aarif Reply
what is demand schedle
Princess Reply
When you make a Scedule of the demand you made
Rodeen
this is helpful for rbi grade b
Prema Reply
What is macroeconomics
Kauna Reply
It's one of the two branches of Economics that deal with the aggregate economy.
Mayen
it's about inflation, occupation, gdp and so on
alberto
What is differences between Microeconomics and Macroeconomic?
Bethrand
microeconomics focuses on the action of individual agents in the economy such as businesses, workers and household. while macroeconomics looks at the economy as a whole. it focuses on broad issues in the economy such as government deficit, economy growth, levels of exports and imports, and
Thelma
inflationary increase in prices
Thelma

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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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