difficult to catch; one in a cartel of a few firms raising airfares between Boston and Washington is easy to catch. The one cartel will be unstable, the other stable. On such considerations of ease of detecting cheaters one can build a theory of oligopoly.9

If one single firm is so large a supplier to a market that the fate of the cartel hangs on its participation, then the crime of cheating brings its own punishment. No shame or fines or execution imposed by other members is necessary. The cartel is self-enforcing. The best example is the position of Saudi Arabia within the international oil cartel. Saudi Arabia produces such a large share of the world's supply of oil that its isolated decision of how much to produce significantly influences the world price of oil. If it produces little oil, the world supply is small and the price is high. If it produces much, the world supply is large and the price is low. That is, its share is so large that it faces by itself a downward-

9 Stigler, The Organization of Industry, Chapter 5, pp. 39-63.

sloping demand curve. By comparison the other participants, such as Venezuela, Nigeria, and Iraq, are tiny: They face the price Saudia Arabia arranges.

Q: What, then, does the payoff matrix to Saudi Arabia look like, interpreting "cooperation" as "restraining one's production of oil" and "defection" as "letting one's production rip, seizing the opportunity offered by the high price on a large instead of a restrained production"?

the other countries do, Saudi Arabia finds that it is in its own interest to cooperate, that is, restrain its own production. So big is Saudia Arabia that the oil cartel's high price stands or falls as Saudia Arabia cooperates or defects.

A: The payoff matrix is so to speak the opposite of the prisoner's dilemma (see Figure 21.11). No matter what

The situation is a common one. The United States is so important in world affairs that various collective undertakings—the United Nations, for example, or NATO—would fall apart if the United States did not support them. It is therefore in the self-interest of the United States to support them, even on unfavorable terms. A small country such as Sweden or France has the luxury

Figure 21.11

Little Members of a Cartel Exploit the Big Members

Because the cartel will collapse without its participation, the big member of a cartel must abide by its rules no

The Choice of Other, Smaller ma"er what the, ',ittle ™emberj do- TLhe little member OPEC Countries can irresponsible without suffering the consequences,

(payoffs to Saudi Arabia) ''tl'e memher, therefore, exploits the big member.

Cooperate Defect

Cooperate (restrains its own production)

The Choice of Saudi Arabia

Defect (lets its production rip)

Cooperate (restrains its own production)

Defect (lets its production rip)

Extremely High

Profits // to Saudi // Arabia

High Profits to Saudi Arabia

Moderate Profits to Saudi Arabia

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