Examination of the chart above gives revealing insight into the overall market within our cartel.

On the left side of the arch, it is obvious that as the quantity rises, the price declines. However, overall profit for the cartel rises. The arch shape of the profit plot informs you that there is an equilibrium to the overall cartel profit that is directly related to quantity produced. As quantity increases, profits increase until the market exceeds 45 total barrels. At 45 total barrels, the market achieves an equilibrium leading to equal profits for each firm individually. If the market exceeds 45 barrels, the overall profit margin decreases. This, as illustrated by chart 2, happens because marginal cost exceeds marginal revenue. Unfortunately with this market, there are incentives for members of the cartel to try and maximize their revenue at the expense of the total market . During the first three rounds, there was a sustained but mild increase in quantity along with a decrease in prices. There were a few teams that did not honor the agreement from the start. This caused the cartel to become unstable almost immediately. As we progressed into rounds two and three, the quantity continued its ascent and the prices fell. There was an effort to strengthen our foundation by communicating everyones continued commitment to the 45 barrel agreement. It is obvious, by examining the results, that no group truly believed the others could be trusted. Social pressure from the other cartels would have possibly been effective if the pressure was apparent from the beginning. Since all the cartels were relatively lax at the beginning there was no real pressure from cartel to cartel. Each cartel seemed nonchalant and trusted one another initially. Not until the later rounds did cartels attempt to put pressure on one another to produce an equal amount. Even as the social pressure mounted, there were a few cartels that still did not go with the social norm. They produced more than was publicly communicated. Each cartel knew that if everyone 1

produced the same amount , profits would be equal. Some of the cartels capitalized on honesty by producing more in order to maximize profits. In the end, ultimatums were issued to produce the maximum amount of barrels with no profit if all cartels did not respond to deadlines.

It was obvious from the first round that social pressure would not be an effective enforcement mechanism. Although we did care about fellow cartels, in the end it was about us. A possible mechanism to have all cartels in compliance could be to impose a penalty deferring their incentive to cheat. If a cartel strayed away from the barrel average by a certain amount, a profit penalty would occur which would diminish profits on that round. This would cause cartels to be hesitant to over produce. A secondary mechanism that could greatly effect production is setting a total barrel amount that each cartel could produce for the entire experiment. Each cartel would then have to allocate the barrels through the entire experiment instead of each round. We feel that the cartels would have complied if either of these mechanisms would have been used as opposed to relying on social pressure.