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Implicit Cartels: 14.12 Game Theory Muhamet Yildiz

This document discusses implicit cartels in oil markets using game theory. It presents models of monopoly production and optimal cartel production where firms can sustain cooperation through punishment strategies if another firm defects. Specifically, it examines strategies where firms produce at monopoly or cartel levels as long as no firm defects, but will switch to competitive outputs if any firm defects to punish them and maintain cooperation. Additional models discussed include "carrot and stick" strategies and price wars where firms rotate between cooperative and punitive modes in an attempt to sustain implicit collusion without explicit coordination.

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88 views11 pages

Implicit Cartels: 14.12 Game Theory Muhamet Yildiz

This document discusses implicit cartels in oil markets using game theory. It presents models of monopoly production and optimal cartel production where firms can sustain cooperation through punishment strategies if another firm defects. Specifically, it examines strategies where firms produce at monopoly or cartel levels as long as no firm defects, but will switch to competitive outputs if any firm defects to punish them and maintain cooperation. Additional models discussed include "carrot and stick" strategies and price wars where firms rotate between cooperative and punitive modes in an attempt to sustain implicit collusion without explicit coordination.

Uploaded by

munchka
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1

Lecture 15
Implicit Cartels
14.12 Game Theory
Muhamet Yildiz
Inflation Adjusted
Mont hly CRUDE OIL PRICES
(1946present) In June 2010 Dollars
C www.lnflat ionData.com
Updated 7/21/2010
$140
June 2008 Monthly Ave. Oil Price
Dec. 1979 Monthly Ave. Peak S125.83in June 2010 Dollars ---...
$120
$107.99 in June 2010 Dollars
$1 00 ----- -- - -- --- -- - -- --- -- --- -- --- --- -- --- --- -- - -- --- - - --- -- --- --- -- --- --- -- --- --- -- - -- --- -- ----
$80
Nominal Peak $38 (Mo. Ave. Price)
____
$60
__
$40
Inflation Adjusted Oil Price
$20
Nominal Oil Price -.
$0
Source of Data:
Oil Prices- WMY.ioga.comiSpeciallcrudeoiLHist.htm
CPI-U Inflation index- WMY.bls.gov
2
Courtesy of InflationData.com. Used with permission.
Road Map/Model
Model: Infinitely Repeated Cournot Oligopoly:
n firms, MC = 0;
Zero marginal cost;
p = max{1-Q,0};
Road map:
1. Monopoly Production for patient firms
2. Optimal Cartel production
3. Carrot and Stick Strategies
4. Price Wars
3
Monopoly Production
Strategy: Each is to produce q = 1/(2n); if
any firm defects produce q = 1/(1+n) forever.
Vc =
Vo =
V(DIC) =
Equilibrium
(n+1Y -1
~
s: > 4n
u - (
n+1
)2
4n
4
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
0.55
0.5
0 20 40 60 80 100
5
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
0.55
0.5
o 200 400 600 800 1000
6
Optimal Production (n=2)
Strategy: Each firm is to produce q*; if anyone
deviates, each produce 1/(n+1) thereafter.
o Vc=
o V
D-
-
o VOIC =
o Equilibrium iff
o ~
7
0.4
0.3
0.2
0.1
o
o 0.2
x=8, y=(3-53 8Y(%)
0.4 0.6 0.8
x
8
Carrot and Stick
Produce % at the beginning;
at any t> 0,
- produce % if both produced % or both
produced x at (-1;
-otherwise, produce x.
9
Price Wars
(2007 Midterm 2, P3)
Stage Game: Linear Bertrand Duopoly (c=O; Q=l-p)
Strategy: n + I modes: Collusion, WI, W2, ... , Wn.
Game starts at Collusion. Both charge 112 in the
Collusion mode and p*<112 in WI, ... , Wn. Without
deviation, Collusion leads to Collusion, WI leads to
W2, .. . , W(n-l) leads to Wn, and Wn leads to
Collusion. Any deviation leads to Wl.
10
MIT OpenCourseWare
http://ocw.mit.edu


14.12 Economic Applications of Game Theory
Fall 2012
For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.

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