The Cartel Game!
Student Instructions
Cartels and Profit Maximization
A Cartel Tries to Move a Market from “Competition” towards “As if
Controlled by a Monopolist”
Competition
As if Controlled by a Monopolist
P
P
Profit
Pm
Pc
S
D
Qc
Pc
Q
MC = AC
MR
Qm
D
Qc
Q
BACK TO
Your cartel is being watched!
• The class has been divided into four-firm
industries that want to act as cartels
• The government wants to protect its consumers
from greedy fat cats like you colluding on prices
and output.
• The U.S. Department of Justice is watching you
and ready to make an example out of you. Here
is a video on the bust of a Lysine Cartel.
• To play it safe, your cartel agrees not to meet for
the first couple of rounds and act as a
non-collusive oligopoly.
•
•
•
Everyone starts
with an output of
10.
You decide your
output reduction.
Each unit reduced
costs you $1 in
profit but creates
$2 profit for the
cartel ($0.50
profit for you and
for each of the 3
members)
The highlighted
column shows
your possible
earnings based on
the decisions of
others in the
cartel (scroll to
see more).
Decision Screen
• To move the
tokens to the
“My Output
Reduction” box
finger drag
each token
until you are
satisfied with
your decision.
• You can move
tokens back
and forth until
you lock in
your decision.
• Press and hold
the “Done”
token to lock in
your decision.
Decision Screen
• Touch the
others’ average
row to
highlight.
• The red box is
your round
earnings IF you
keep your
current
decision (5)
AND IF the
others’ group
members send
the average
expected (7) to
the “My
Output
Reduction”
box.
WHAT IF? Analysis
• After all
decisions you
see what
others’ average
actually is.
• The Industry’s
Output
Reduction is
calculated.
• The total
output
reduction is
multiplied by 2
and split
evenly to get
your equal
share, which is
added to your
tokens kept =
My Profit.
Summary Screen
To Collude or Not Collude?
• Let’s try a few rounds where you can meet with
your cartel members and collude on an industry
output reduction level.
• Option 1: Government legalized your cartel
• Option 2: Collusion is still illegal, but they are not
watching you as often
– Professor will flip a coin twice for each group. If it’s
heads twice then the cartel will have to act like a
competitive industry and not reduce output the next
round.
Discussion of the Cartel Game rounds
• Who reduced their output by the full amount?
Why?
• Who did not reduce their output? Why?
• Who did something else?
• Did collusion help more?
• Were you willing to take the risk of colluding
and getting caught?
Cartel Problems
• The Cartel Interest – reduce output and
maximize cartel profits.
– Need coordination to form a collusive agreement,
which is illegal in U.S.
– Need cooperation to uphold the collusive
agreement
Cartel Problems
• The Self-Interest – increase output and capture more
market share
– Incentive to cheat on collusive agreement
– Incentive to increase output by a firm in cartel is greater
than for a monopoly because the loss in revenue is split
amongst the other cartel, so the net gain in revenue is
greater
– Cheating cartel member makes more profits
• Retaliation and Cartel Breakdown
– Conditional Cooperation – You cheat, so will I!
– Cartel becomes a competitive oligopoly or breaks into a
price war
– Good for customers and efficiency, bad for the cartel’s
profits
Other Things That Break Down Cartels:
Decrease in Market Demand
• What if customers, in their long-run
expectation of your cartel’s high prices found
substitutes for your product or ways to
conserve and decreased their overall demand.
• Now each output unit reduced will produce
less industry profit for the cartel = $1.20.
• Incentive to cheat is greater because the
opportunity cost of reducing output is $0.70
instead of $0.50.
Other Things That Break Down Cartels:
New Entrants and Size of Cartel
• Profits attract the entry of new firms (who may or
may not join the cartel) if barriers to entry are
weak.
• What if the size of the cartel was increased such
that the class only had two cartels instead of
several.
• Each output unit reduced will produce the
original industry profit for the cartel = $2, but this
profit is divided among a larger number of firms.