ggchappell 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

ggchappell 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.