In our recent blog we explored the Prisoner’s Dilemma, a simple but powerful idea from game theory that explains why people, companies, or countries sometimes make choices that seem logical individually but end up hurting everyone.
Now, we are going to take that idea further and look at cooperation in the real world, and what happens when it turns into collusion or cartel behaviour.
By the end, you will understand why OPEC, De Beers and even airlines sometimes act together to control prices, and why this is directly connected to the Prisoner’s Dilemma.
Cooperation vs Collusion
Cooperation is when individuals or companies work together in a fair and legal way to achieve mutual benefits.
- Example: Two coffee shops coordinate opening hours to avoid customers waiting too long.
Collusion, on the other hand, is when players secretly work together to manipulate the market.
- Goal: reduce competition and increase profits.
- Usually illegal.
A cartel is a group of firms that agree to fix prices, limit production, or divide customers to boost their profits.
How the Prisoner’s Dilemma Explains Cartels
Cartels face the same problem as the Prisoner’s Dilemma:
- All members would benefit if they cooperate and keep prices high.
- However, each has an incentive to cheat by lowering their prices secretly to gain customers.
- If everyone cheats, profits fall, just like the classic Prisoner’s Dilemma scenario.
Here is a simple example with two firms in a cartel:
| Firm B Cooperates (High Price) | Firm B Cheats (Undercuts) | |
|---|---|---|
| Firm A Cooperates | Both earn high profits | A loses customers, B earns more |
| Firm A Cheats | A earns more, B loses customers | Both earn low profits ✅ Nash Equilibrium |
Key concept:
- The Nash equilibrium is the outcome where no one can improve their result by changing strategy, given what the other does.
- In cartels, the Nash equilibrium is often both cheat, even though cooperating would make them all better off.
Real-World Example: OPEC
The Organisation of the Petroleum Exporting Countries (OPEC) is one of the world’s most famous cartels:
- Founded in 1960 by major oil-producing countries.
- Goal: control oil supply to influence prices.
- How it works: Members agree on production limits to maintain higher prices.
The problem:
- Some countries sometimes produce more than their limit to earn extra money.
- If enough cheat, the cartel’s price control weakens, just like the Prisoner’s Dilemma.
Other examples of cartels:
- De Beers – Controlled the global diamond supply for decades.
- Lysine Cartel (1990s) – Companies fixed livestock feed prices, fined billions.
- Airlines – Caught coordinating fuel surcharges on international flights.
Lessons About Cooperation and Human Behaviour
- Cooperation is hard to maintain
- Everyone has an incentive to cheat.
- Short-term vs long-term thinking
- Cheating may bring immediate profit but can harm trust and reduce overall gains.
- Rules and enforcement matter
- Competition laws exist to prevent collusion and protect consumers.
- Game theory explains real-life behaviour
- Even rational decisions by individuals can produce worse outcomes for everyone collectively.
How Students Can Apply This
When writing exam answers or essays:
- Define collusion and cartel.
- Use a real-world example like OPEC, De Beers, or airlines.
- Connect it to the Prisoner’s Dilemma and Nash equilibrium.
- Evaluate:
- Stability of cooperation
- Incentives to cheat
- Impact on consumers
- Short-term vs long-term outcomes
Key Takeaway
The Prisoner’s Dilemma is not just a classroom concept; it explains real-world cooperation and conflict.
- Cooperation can fail if incentives to cheat exist.
- Cheating is often rational individually but harmful collectively.
- Understanding this helps you see patterns in markets, politics and even everyday life.
Do You Want to Learn More?
If you are studying Economics, Business, or Politics:
- Understand collusion and cartels clearly
- Apply theory to real-world examples
- Write high-mark exam answers
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