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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 balance of payment
Tih Reply
I don't know
balance of payment is the sum total of a country receipt for her exports and the total payments made for her imports.
discuss collusion of An oligopoly
Fikile Reply
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henry Reply
what is money
Ngea Reply
money is everything
a regulatory object between producer and consumer of monetary system
money is anything generally accepted for the payment of goods and services and for the settlement of debt
a regulatory object of good and services between producer and consumer ( all these comes under monetary system)
what is price surveillance?
Berry Reply
what is favourable balance of trade
what is demand
Oluchi Reply
what are two classical macroeconomics and what're their theories say about their equations?
what is the formula for calculating elasticity
aza Reply
what is elasticity of demand?
Rita Reply
flexibility of demand in terms of price , income and tax ratio .
Causes of economic growth
pierre Reply
What is elasticity of demand
What are the causes of economic growth
economic growth, establishment of industry, encourage of investor's, farm productivities, creation of institutions, construction of good road etc
elasticity of demand can be said to be the responsiveness of demand to a change in prices
impact of collusion in the economy referring to inefficiencies illustrated by means of graph
nondumiso Reply
The Factor price will determine the choice of techniques to produce.Expantiate
what is elasticity of demand?
Etta Reply
state and explain two types of demand
Institution involved in money market
Gande Reply
what is Economics
Kwame Reply
Economic is the study of scarcity
Economics is the study of a lot of things. It is split up into two areas of study, Microeconomics and Macroeconomics. Microeconomics is the study of an individual's choices in the economy and Macroeconomics is the study of the economy as a whole.
Economics is a science that studies human scarcity
What is Equilibrium price?
Equilibrium is the market clearing price. The point at which quantity demanded equals quantity supplied. The point at which the supply and demand curves intersect.
Equilibrium price*
Refers to the study of how producers use limited resources to satisfy human unlimited wants
why is economics important
Derrick Reply
why economics important
name four ways to encourage the development of trade amongs country

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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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