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> Economists typically assert that cartels dissolve naturally after members cheat or become irrational. When computers are the actors, though, detection is fast
by jasonzemos 11y ago
> Economists typically assert that cartels dissolve naturally after members cheat or become irrational. When computers are the actors, though, detection is faster and not prone to human errors or failings, making defection less likely. Automated participants can identify price changes more quickly, allowing defectors who lower prices at the expense of the group to be sifted out earlier. Given this dynamic, participants have little incentive to either “cheat” the group or to leave it.
What is the penalty for defecting from the group to clear the market? An actor gets kicked out of a group in which he was a voluntary member?
Suppliers take a risk by price-fixing in that they may be underutilized, or be left with excess supply. Breaking even occurs when a few customers paying the collusion price net the same income as many customers paying a spot price. Clever suppliers can profit, but all actors are still independent. The only recourse for clearing the market is being left out of future collusion, which means nothing if you're clearing 100% of your supply and the adversary is clearing 0. The only choice of all actors is to compete for satisfaction.
- Dwolb 11y agoggchappell nailed it with an iterations of the prisoner's dilemma situation combined 'price signaling'. Take a single, 1 round game of pricing iPods at Wal-Mart and Target. iPods have a cost of $100 and each competitor already has bought the item. What would both competitors price at? (something a above 0 and probably logically around the cost of the product) Now, let's take a game of 1000 rounds. Same situation, but Wal-Mart has stuck to a strategy of price-matching in each successive round. What would the price be that the competitors arrive at over time? (higher than the cost to maximize group surplus) In this situation it is no longer optimal to break rank with lower prices because the gains are short-lived and cannot make up for the effects of long-term margin compression.
- ggchappell 11y agoYour analysis is correct if we optimize our algorithm to maximize the profit from its most recent trade. But, as with the iterated prisoner's dilemma, what makes a successful strategy can change when a game is played repeatedly. Imagine a genetic algorithm that comes up with a tit-for-tat strategy when playing the iterated prisoner's dilemma. Now imagine a similar genetic algorithm applied to automated trading. Imagine a market in which a large fraction of the trading is done by such algorithms. I think it is quite plausible that a cartel could form more or less spontaneously, without any conscious encouragement in that direction from human programmers. (But hey, maybe you have a good argument that I'm wrong.)
- harry8 11y ago"Economists typically assert that cartels dissolve naturally after members cheat or become irrational." Really? Most economists I know acknowledge OPEC still exists and is still a functioning cartel. And they acknowledge that many economists predicted otherwise when it formed and were wrong. I'm pretty sure even those who made such predictions (Milton Friedman from memory for one) have acknowledged they were completely wrong. "As everybody knows..." Was how such falsehoods used to be prefaced in the bad old days in the Soviet Union, so I'm told.
- pjc50 11y agoTo what extent OPEC is functioning and able to effectively control the oil price is very much debatable today, especially since shale oil.
- tormeh 11y agoYou're nitpicking. Shale's an external disturbance. It says nothing about the inherent stability of cartels in general or OPEC in particular.