ECON 040 Lecture Notes - Lecture 13: Nash Equilibrium, Coordination Game, Strategic Dominance
5 Aug 2020
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Document Summary
Cartels represent private agreements aimed at increasing the profit of the cartel members by reducing competition in the market: cartels are pretty much illegal everywhere and are prohibited under competition law. Because cartels are illegal, they cannot write enforceable contracts to keep members in line, thus a situation akin to the prisoner"s dilemma occurs. Cartels want to keep the price above a certain level to maximise total surplus, so both sides are instructed to not cut their price. However, the dominant strategy for firms is price cut . Authorities such as accc prevent collusion/cartels from developing, as it prevents cartels from fixing/controlling prices within a market, which will be detrimental for consumers. Coordination games are types of games that capture those situations where the players benefit from coordinating their decisions. If a and b do not engage in the same activity, then the utility generated for each individual is 0.
