ECON 262
In Class Exercise Seventeen – Cartels and the Pay-Off Matrix
1. What are cartels trying to accomplish (generally) and how?
2. Name five circumstances that are conducive to a cartel being successful.
1.
2.
3.
4.
5.
3. Even if a cartel can form -- it still faces big problems - explain a couple of these problems.
4. Using the pay-off matrix below AND words, explain why cartels usually break down (why there is an incentive to cheat and end up at the Nash equilibrium).
a. Use the following pay-off matrix. Make sure your numbers are logical!!
| Bob's Bolts Cheats | Bob's Bolts Upholds Cartel | |
| Betty's Bolts Cheats | Bob's Payoff = $
Betty's Payoff = $ |
Bob's Payoff = $
Betty's Payoff = $ |
| Betty's Bolts Upholds Cartel | Bob's Payoff = $
Betty's Payoff = $ |
Bob's Payoff = $100,000
Betty's Payoff = $100,000 |
b. What are the two reasons cheating will most likely occur?
c. Where is the Nash equilibrium on your pay-off matrix? Explain.
5. What questions do you still have about this material?