GAME THEORY AND

CARTELIZATION

PRESENTED BY:
TINA GUPTA
ONAM TAYAL
SURABHI MAHAJAN
SWATI SOOD
GARIMA TYAGI
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 INTRODUCTION

 Game Theory is a mathematical tool.

 Helps study strategic situations.
 Studies the behavior of competition and
cooperation between players.
 The player needs to take into account the other
players decision and actions

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 CONCEPTS
 Players: They are the participants in the game.
 Strategy: Course of action taken by one of the
participants.
 Payoff: Outcome or result of the strategy.
 Equilibrium: When no player in the game can
take any action to make its payoff any better.

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 NASH EQUILIBRIUM
 In 1951, John Nash developed this.

TONE----> ADVERTISE DO NOT

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RING
ADVERTISE (20,20) (10,25)
DO NOT (40,20) (65,25)
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 PRISONER’S DILEMMA
 Demonstrates why two people might not
cooperate even if its in their best interest.
 Albert W Tucker explained it with a little story

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 Prisoner’s dilemma is of interest to the social
sciences such as economics, politics, sociology
as well as biological sciences.
 In economics: We take the example of
ADVERTISING

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 TYPES OF GAMES
• Co-operative and Non-cooperating

• Normal Form and Extensive Form

• Two Person and n Person

• Simultaneous Move and Sequential Move

• Zero Sum and Non-Zero Sum

• Symmetric and Asymmetric Games

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Application of Game Theory in
Economics

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 What are cartels ?

As per Competition Act, 2002:

“ Cartel includes an association of producers, sellers,

distributors, traders or service providers who, by agreement
amongst themselves, limit, control or attempt to control the
production, distribution, sale or price of, trade in goods or
provision of services” Sec. 2 (c)

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 Why cartels form
 firms form a cartel so that they can raise
profits
 they earn greater profit by coordinating
their activities rather than acting
independently

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 Types of Cartels
 Public

 Private

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 FACTORS
 Number of firms in the industry
 Characteristics of the product sold by the firms
 Production costs
 Behavior of demand

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DISADVANTAGES
OF
CARTELIZATION

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 Conditions for Cartel failure
 Cartels are not a very successful form of operations
for there is always an incentive to cheat charge a bit
lower price, sell higher output and increase profits.

Example - (OPEC)
includes major oil producers Saudi Arabia, Iran, Kuwait, and
Venezuela. Like any other cartel, OPEC suffers from the problem
that individual members prefer to exceed their quotas. From a
short-term perspective, no matter what others do, each member’s
best strategy is to cheat.

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 Lead to dead weight loss
 Cartels like monopoly do lead to dead weight
loss for they charge P and sell q but they
should have charged P1 and sold Q1 this leads
to decrease in consumer surplus and resources
being kept ideal.

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 No benefit towards economy
Cartels are not even of a great help to their own
economies
Example - OPEC’s stated mission is to promote the
economic development and growth of its
member states while minimizing volatility in the oil
markets. But after a promising beginning many
member states’ economies have declined rather
than prospered —a clear indication of OPEC’s
failure to meet their development goals.

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 Lead to Production disputes
 Cartels often lead to production disputes

Example - the economic needs of the OPEC

member states often affects the internal politics
behind OPEC production quotas. Various
members have pushed for reductions in
production quotas to increase the price of oil
and thus their own revenues.

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 Leads to long term instability
 Cartels mostly run the problem of long term
instability

Example - In other words, the members of a cartel

always have an incentive to deviate from their
agreement which explains why cartels are generally
difficult to sustain in the long run. Empirical studies
of 20th century cartels have determined that the
mean duration of discovered cartels is from 5 to 8
years.
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THANK YOU

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