Cartels, Auctions, and the Prisoner’s Dilemma
https://doi.org/10.1038/s41598-019-47198-1
This article is about cartel detection in public auction markets. To give some context, cartels are groups of competing firms that raise prices collectively, resulting in consumers paying more than they have to. This practice is illegal, but these practices are hard to detect and people may often be fooled. The economists who wrote the paper found that it was more common for firms of the same size to get involved in this. The paper continues to suggest methods for detecting cartel among firms, one of which was the situation model, in which the rate in which members unanimously cooperated on a contract is heavily weighted. Although the authors of the paper did state limitations such as “[they did] not consider the idea that some firms might simply be honest and refuse to form a cartel even in optimal conditions”, it ultimately suggested that there are ways to approach these cases with some extra information about the specific market involved. This gives insights for cartel detection in the future and it is something that will be very important to the consumer industry for economists moving forward.
This relates to two of the topics discussed in class game theory (Prisoner’s Dilemma) and auction. This is relevant specifically to the prisoner’s dilemma because firms have to choose whether or not they want to participate as a part of the cartel. If both firms do agree to participate, consumers will inevitably be forced to pay higher prices as all of the supply in the market will now have higher prices. However, if only one firm raises its prices while the other does not, the firm that did not raise its price will likely get all the consumers. Just like the prisoner’s dilemma, it is best to confess, or in this case, not raise the price, to retain consumers. Additionally, this relates to auctions as it was observed that cartels often engage in bid-rigging auctions, coordinating their bids to avoid competition from others. In the simulation model, I mentioned in the first paragraph, the firms know the other participants and prices. As we have learned in classes, this gives them an unfair advantage as they have access to more information that other participants do not.