Why Do Companies In Cartels Cheat?

The behavior of the cartels and their incentive to cheat can be better understood by applying to the cartels a very known of theory of a game known as Prisoner’s Dilemma.

The theory of this game is a non zero sum game that studies how people behave in strategic situations – situations in which the actions or anticipations of the actions of people are considered by other people that then modify their respective actions.

One good example of this type of game is chess and checkers as these are both strategic situation games since the way that a person plays now will change what the opponent will decide to do in the next move. Even more importantly, what you might believe your opponent is going to do in answer to each one of your moves now will help you to make a better decision. In other words this means you are taking into account how your opponent is going to react to each one of your possible moves before deciding what to do.

Cartels are also strategic situations because each company needs to consider the reaction of the other companies before deciding what they should do. Therefore, the models of the game theory are the best way of understanding the motivations and temptations that lead to the behavior of members that are in a cartel.

In order to make it a bit easier to understand, we can examine how a duopoly works, which is an industry in which there are only two companies. Both of these companies have the opportunity of forming a cartel, acting the way a monopoly would and generating the benefits that a monopoly would obtain, that can later be shared. But would this actually occur? That would depend on if one of the companies, or both of them, cheat according to the cartel.

One very good way of understanding the temptations of each company is to study the game of Prisoner’s Dilemma, which is a game in which two criminals need to decide individually if to cheat in an agreement that had previously been established between both to not tell the police about their illegal activities.