Cartel Game

Each round, each firm either cooperates (keeps the agreed high price) or cheats (undercuts). If both cooperate, each earns 10 points of profit. If you cheat while Firm A cooperates, you earn 12 and Firm A earns 4. If both cheat, each earns 6. In any single round, cheating pays you more whatever Firm A does: 12 beats 10, and 6 beats 4. Yet if both firms cheat, each ends up with 6 instead of 10. Economists call this trap the prisoner's dilemma.

Playing many rounds changes things, because Firm A can hit back next round. A round of extra profit may cost you many rounds of lower profit. In 1980 the political scientist Robert Axelrod ran a computer tournament in which experts submitted strategies for a repeated prisoner's dilemma. The winner was tit for tat, one of the simplest entries: cooperate first, then copy whatever the other player did last time. In a second tournament, with 62 entries, it won again.

Real cartels face the same temptation, and the law as well: price-fixing cartels are illegal in the EU, the US and many other places. In 2016 the European Commission fined four truck makers a record 2.93 billion euros for agreeing on prices from 1997 to 2011. A fifth member, MAN, escaped a fine of about 1.2 billion euros because it was the firm that told the Commission about the cartel. Rewarding the first firm to confess gives every member one more reason to break the deal.