Alright, so let's continue here on the bottom part of the page. So in this game, both players would have been better off, right? They could have been better off if they could have discussed with each other, hey let's both keep our mouth shut and we'll only get 1 year in prison, right? If they could cooperate and both don't confess, they would have been in a better place, right? They would have had only 1 year each instead of 8 years each, right? So what do we call this, right? Now let's extend this to the idea of the oligopoly, right? Here we were just talking about the prisoner's dilemma, let's see how this relates in the big sense. Well, when we think about this with firms, this could be firms colluding together. We're going to think of this idea of collusion where they work together to set prices, right? So it's an agreement between the firms to set their quantities and price, okay? So that's called collusion where they're working together and that's illegal in the United States. Competing firms are not allowed to explicitly talk about pricing or quantity, right? It's not like McDonald's can call Burger King and say, hey, let's raise our prices of burgers and everyone's going to charge $3 for burgers or Coke calling up Pepsi and saying, hey no longer are we going to sell 20 ounces for a dollar, 20 ounces are going to be $4 now, okay? That's not allowed. That's illegal in the US because it's reducing competition okay? So what we call firms that are colluding is called a cartel. Okay, a cartel is firms that are colluding together. The group colluding together is a cartel. A very famous cartel is OPEC. So OPEC is a group of Middle Eastern nations that get together and set prices and quantities that they're going to put for oil, right? They control a lot of the world's oil and they limit the quantity so that they can inflate the price, okay? That would be illegal in the United States, but they're not in the United States so they can do whatever they want over in their country, okay? So OPEC is an existing cartel, but what we're going to see in situations where people are colluding and where we have cartels is that there's an incentive to cheat, to increase their individual profits. I'm going to put individual profit up here, okay? So you could cheat when you know other people are going to cooperate, right? So the idea is this cartel, they all cooperate on what quantity they're going to produce, but then you have that information, you know what everyone's going to produce and you have that incentive to cheat and produce a little extra to make more money or something like that. So let's think about this idea of Cartel in our situation up here, right? If they had gotten together and they were able to collude together to say, hey let's both not confess, right? If we both don't confess we only get 1 year instead of the 8 year equilibrium. They're obviously both very smart at game theory and have been through this class before. Alright, so they think they could collude and they'll each get 1 year. But let's think about that incentive to cheat. Now Bad Boy Benny, after this discussion with Evil Eddie, knows that Evil Eddie is planning to not confess, right? So if Evil Eddie is planning to not confess, Bad Boy Benny could cheat and confess, right? He could confess and he could go free. We could be in the situation where Evil Eddie doesn't confess and Bad Boy Benny takes advantage of it, confesses, Bad Boy Benny is gone. 0 years in prison, Evil Eddie gets 20 years and Bad Boy Benny is better off, right? He increased his individual profit, right? His own profit which was less time in prison by cheating, cool? So there's that incentive to cheat when you know that other people are going to cooperate. So the last thing here is an idea of implicit collusion, okay? So price leadership is not illegal in the United States, it might be a bit unethical, but the idea here is where we're going to have one firm taking the role of the price leader, okay? So it's a form of collusion where one firm announces a price, so let's say there's a new video game system, right? And it's like the PS12 or whatever and the PS12 comes out and Walmart announces, we are selling PS 12s for $500 right? And then you see Target's $500 Toys R Us $500 Everybody's selling the PS 12 for $500 right? And that's because of this price leadership situation, right? The first firm announced the price and everyone followed suit because they knew that they could make more money if they all charge the same higher price and increase their profit, okay? So this is not illegal because you're not really colluding, you're just saying hey, they're charging 500, I'm going to charge 500. We didn't talk about this at all, it just seems like the right price to me, right? So you could see how there could be some gray areas there. Right, price leadership that's a form of implicit collusion. Cool? Let's go ahead and move on to the next video now.
Table of contents
- 0. Basic Principles of Economics1h 5m
- Introduction to Economics3m
- People Are Rational2m
- People Respond to Incentives1m
- Scarcity and Choice2m
- Marginal Analysis9m
- Allocative Efficiency, Productive Efficiency, and Equality7m
- Positive and Normative Analysis7m
- Microeconomics vs. Macroeconomics2m
- Factors of Production5m
- Circular Flow Diagram5m
- Graphing Review10m
- Percentage and Decimal Review4m
- Fractions Review2m
- 1. Reading and Understanding Graphs59m
- 2. Introductory Economic Models1h 10m
- 3. The Market Forces of Supply and Demand2h 26m
- Competitive Markets10m
- The Demand Curve13m
- Shifts in the Demand Curve24m
- Movement Along a Demand Curve5m
- The Supply Curve9m
- Shifts in the Supply Curve22m
- Movement Along a Supply Curve3m
- Market Equilibrium8m
- Using the Supply and Demand Curves to Find Equilibrium3m
- Effects of Surplus3m
- Effects of Shortage2m
- Supply and Demand: Quantitative Analysis40m
- 4. Elasticity2h 16m
- Percentage Change and Price Elasticity of Demand10m
- Elasticity and the Midpoint Method20m
- Price Elasticity of Demand on a Graph11m
- Determinants of Price Elasticity of Demand6m
- Total Revenue Test13m
- Total Revenue Along a Linear Demand Curve14m
- Income Elasticity of Demand23m
- Cross-Price Elasticity of Demand11m
- Price Elasticity of Supply12m
- Price Elasticity of Supply on a Graph3m
- Elasticity Summary9m
- 5. Consumer and Producer Surplus; Price Ceilings and Floors3h 45m
- Consumer Surplus and Willingness to Pay38m
- Producer Surplus and Willingness to Sell26m
- Economic Surplus and Efficiency18m
- Quantitative Analysis of Consumer and Producer Surplus at Equilibrium28m
- Price Ceilings, Price Floors, and Black Markets38m
- Quantitative Analysis of Price Ceilings and Price Floors: Finding Points20m
- Quantitative Analysis of Price Ceilings and Price Floors: Finding Areas54m
- 6. Introduction to Taxes and Subsidies1h 46m
- 7. Externalities1h 12m
- 8. The Types of Goods1h 13m
- 9. International Trade1h 16m
- 10. The Costs of Production2h 35m
- 11. Perfect Competition2h 23m
- Introduction to the Four Market Models2m
- Characteristics of Perfect Competition6m
- Revenue in Perfect Competition14m
- Perfect Competition Profit on the Graph20m
- Short Run Shutdown Decision33m
- Long Run Entry and Exit Decision18m
- Individual Supply Curve in the Short Run and Long Run6m
- Market Supply Curve in the Short Run and Long Run9m
- Long Run Equilibrium12m
- Perfect Competition and Efficiency15m
- Four Market Model Summary: Perfect Competition5m
- 12. Monopoly2h 13m
- Characteristics of Monopoly21m
- Monopoly Revenue12m
- Monopoly Profit on the Graph16m
- Monopoly Efficiency and Deadweight Loss20m
- Price Discrimination22m
- Antitrust Laws and Government Regulation of Monopolies11m
- Mergers and the Herfindahl-Hirschman Index (HHI)17m
- Four Firm Concentration Ratio6m
- Four Market Model Summary: Monopoly4m
- 13. Monopolistic Competition1h 9m
- 14. Oligopoly1h 26m
- 15. Markets for the Factors of Production1h 33m
- The Production Function and Marginal Revenue Product16m
- Demand for Labor in Perfect Competition7m
- Shifts in Labor Demand13m
- Supply of Labor in Perfect Competition7m
- Shifts in Labor Supply5m
- Differences in Wages6m
- Discrimination6m
- Other Factors of Production: Land and Capital5m
- Unions6m
- Monopsony11m
- Bilateral Monopoly5m
- 16. Income Inequality and Poverty35m
- 17. Asymmetric Information, Voting, and Public Choice39m
- 18. Consumer Choice and Behavioral Economics1h 16m
14. Oligopoly
One-Time Games and the Prisoner's Dilemma
Video duration:
5mPlay a video: