ABSTRACT
This chapter begins with a return to the prisoner's dilemma model. It was shown that in any finite prisoner's dilemma game, like the one depicted in, the players will always play the dominant strategy of low price, low price. The chapter uses the term perfect collusion to indicate that the firms are producing the joint profit-maximizing output. The grim strategy presented in the previous section either maintains effective collusion or results in very large profit losses for both firms if either firm ever defects. A tacit price-fixing agreement is a method of collusion where firms fix identical prices without ever meeting to discuss prices because of a meeting of the minds. The chapter examines what other factors influence the ability of a cartel to maintain an agreement. The number of firms, the rate of technological advance, the rate of demand growth, and the frequency of sales also impact the effectiveness of cartel agreements.
