In Singapore, 13 fresh chicken suppliers together accounting for 90% of market share have received a record $27 million fine for operating as a cartel, fixing prices at a high level and restricting output. To achieve this representatives of the firms repeatedly met at at the Poultry Merchants' Association. Analyse the interaction between the firms using game theory. Simplify your model to only 2 players representing the different firms in this industry. Present a payoff matrix to model the situation and analyse it for Nash equilibrium. Which is the best outcome for each firm? Which is the best outcome for society as a whole? Why did government invest in the costly investigation and prosecution of these companies?
In a standard 2 player game, we will arrive at something called Cournot Equilibrium.
If both collude, they can set prices which increase total profit and then divide it in half, among themselves. But if one firm stays at that price while other moves to a better price, the moving firm will get higher profit. Let us show it in a table
| Firm 2 | |||
| Collude | Do Not Collude | ||
| Firm 1 | Collude | (500 , 500) | (300 , 700) |
| Do Not | (700, 300) | (400 , 400) |
It can be seen that at the end, both firms will be better off not colluding, whether the other abides by the rules of collusion agreement or not. So, at the end, both will end up not colluding.
For society as a whole, the best outcome would be where the total surplus (consumer+producer) is highest. And this would be where marginal societal cost=marginal societal benefit.
Marginal societal cost is nothing but marginal cost of producing the product. And the demand curve is the Marginal societal benefit curve. where these 2 meet, is the price and quatity where the societal benefit would be highest.
The government invested in this costly prosecution because collusion means that the total societal surplus is lowered. The producer surplus rises but even more consumer surplus is lose, resulting in deadweight loss. That is a loss to society as a whole and hence must be stopped from happening.
In Singapore, 13 fresh chicken suppliers together accounting for 90% of market share have received a...
Imagine the following hypothetical situation. Two firms, Amazing Chicken and Best Chicken, have become the only suppliers of fresh chicken meat in Malaysia. Both firms are seeking to increase their profits and are considering entering into illicit price collusion by agreeing to charge artificially high prices. Such a practice is illegal and risks heavy fines. Analyse the interaction between the two firms using game theory. Present a payoff matrix to model the situation and analyse it for Nash equilibrium. Which...