Cartels and Collusion

Game Theory · Axiom Academy

REAL WORLD Cartels and Collusion Why cooperation fails when everyone wants to cheat The World's Most Famous Cartel In 1973, members of OPEC (Organization of Petroleum Exporting Countries) agreed to drastically reduce oil production. The result? Oil prices quadrupled from 3 to 12 per barrel almost overnight, causing a global energy crisis. This was one of history's most successful examples of a cartel – a group of firms that coordinate their behavior to increase profits by acting like a monopoly. But here's the puzzle: if cartels are so profitable, why don't they last? Founded: 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela Current members: 13 countries controlling ~40% of world oil production 1973 Oil Embargo: Prices rose 300% in months Challenge: Members constantly tempted to overproduce and undercut agreed quotas Imagine two competing airlines on the same route. If they both charge high prices and restrict seats, they can split monopoly profits. But each airline faces a powerful temptation: undercut your rival and steal all the customers . This is a repeated Prisoner's Dilemma . In a one-shot game, both firms would cheat. But when the game repeats indefinitely, cooperation becomes possible through the threat of punishment. What makes a cartel stable in repeated games? Adjust the parameters below to see how different factors affect cartel stability. The simulation shows how long a cartel can maintain cooperation before someone cheats.

This is the written version of the interactive lesson above. See the full Game Theory course.