Perhaps the best known and most effective cartel in the world is OPEC, the Organization of the Petroleum Exporting Countries. In 1973, OPEC members reduced their oil production. As we know that middle Eastern crude oil had few substitutes, the profits of OPEC members exploded. From 1973 to 1979, the price of oil increased by $70 per barrel, a figure not seen at the time. However, in the mid-1980s, OPEC began to weaken. The discovery of new oil deposits in Alaska and Canada introduced new alternatives to Middle Eastern oil, sending OPEC prices and profits down. At about the same time, OPEC members began cheating in an attempt to increase individual profits. Several factors are deterresing. First, pricing in the United States is illegal and there are antitrust laws to prevent business-to-business agreements. Secondly, coordination between companies is difficult and the number of companies involved is all the more important. Third, there is a risk of overtaking.
A company may agree to meet and then break the agreement, undermining the profits of the companies that still maintain the agreement. Finally, a company may be deterred from collusion if it is not able to effectively sanction companies that could break the agreement. A true duopoly is a specific type of oligopoly in which there are only two producers in a market. There are two major duopoly models: Cournot Duopoly and Bertrand Duopol. The prisoner`s dilemma is a specific type of game in game theory that shows why collaboration can be difficult to hold for oligopolists, even if it is beneficial for both parties. In the game, two members of a criminal gang are arrested and imprisoned. The prisoners are separated and left to see their possibilities. If both prisoners confess, each is serving a two-year prison sentence. If one confesses, but the other denies the act, the one who confessed becomes free, while the one who denied the crime received a three-year prison sentence. If both deny the crime, they will serve only one year in prison.
Betraying the partner with a confession is the overriding strategy; This is the best strategy for each player, no matter how the other player plays. This is called the Nash balance. The result of the game is that the two prisoners follow an individual logic and betray if they had achieved a better result together, if they had both cooperated. Companies in an oligopoly can increase their profits through collusion, but collusive agreements are inherently unstable. In an oligopoly, companies are interdependent; they are concerned not only with their own decisions about the quantity to be produced, but also with the decisions of other companies in the market. Game theory provides a useful framework for thinking about how companies can act in the context of this interdependence. Specifically, game theory can be used to model situations where each player must also think about how other actors might react to this action when deciding to act. OPEC: OPEC oil-producing countries have been working temporarily to raise global oil prices to achieve a stable income. In such a scenario, there are a number of plausible reactions and results. If Coca-Cola lowers their prices, Pepsi can follow up to make sure they don`t lose market share.
In this situation, the exodus leads to defeat. In other words, due to the initial price decline due to Coca-Cola (betraying the status quo), both companies are likely to see lower profit margins. On the other hand, despite the Coca-Cola gap, Pepsi managed to maintain the price point by sacrificing market share to Coca-Cola, while maintaining the established price point. Detention dilemma scenarios are difficult strategic choices, as any deviation from established competitive practice may result in a decrease in gains and/or market share.