A Secret Agreement Between Competing Businesses To Cooperate Is Called

Prisoner Dilemma: Betray the dominant strategy for both players because it ensures a better individual result, regardless of what the other player does. However, the result is not perfect. Both players would have been better off if they had cooperated. Conspiracy When people come together and make a plan to do something illegal, it`s a conspiracy. Criminal conspiracy is the closest charge to what people usually think when they say collusion is illegal. Technically, it may not be the agreement that is illegal; It is the planning (conspiracy) that is against the law. It is worth remembering that conspiracy is illegal, even if the planned criminal event never takes place. According to law and economics professors Robert H. Lande and Howard P. Marvel, one of the ways businesses can work together is to artificially set prices for products or services. For example, if almost all of the bananas sold in the United States came from three companies, they might be able to come together and agree to charge no less than a certain amount for their products. In this way, collusional firms force buyers to pay more than they would normally get on an open market, which would otherwise naturally lead to lower prices as competing firms attempt to underpers pierce each other. For example, game theory may explain why oligopolies have difficulty maintaining collusive agreements to generate monopoly gains.

While together, companies would be better off if they worked together, each company has a strong incentive to defraud and under-coerce competitors in order to increase their market share. Because the incentive to default is strong, companies cannot even enter into a collusive agreement if they do not perceive that there is a way to effectively punish defectors. Sometimes companies do not fail with each other, even if cooperation leads to a better collective outcome. The prisoner`s dilemma is a canonical example of a game that is analyzed in game theory and shows why two individuals may not work together, even if it seems that it is in their best interest to do so. Whether cartel members choose to defraud the cartel depends on the fact that the short-term revenues from the fraud outweigh the long-term losses resulting from the eventual bankruptcy of the cartel.