

Cheating for $20: Why collusion and price fixing is difficult to do - cwan
http://freakonomics.blogs.nytimes.com/2009/10/22/cheating-for-a-20/

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sfnhltb
Interesting that 87.5% of the players didn't cheat, and the one that did bid
0.3% of the supposed equilibrium price, but this is somehow supporting the
theory put forward.

It reminds me of the RAND corporation experiment, an economist and a
mathematician play the game and reach Nash Equilibrium in a handful of moves.
Same game played by secretaries and they all co-operate all the time
completely defying all of the theories they build up like a house of cards. So
in an economy where everyone studies math for decades and has no social skills
we have a great tool to predict the economy, but for most of the real world
isn't much help.

Sure it can work in certain financial markets with no contact between
participants outside the market mechanism and most of the players can be
assumed reasonably expert, so it has its uses, but a lot of care needs to be
used when trying to take it outside that sort of area because the assumptions
break down very badly in most situations.

~~~
jimmybot
It only takes one cheater for the collusive agreement to collapse.

~~~
pyre
True, and we do see this happen. Look at RAMBUS and SDRAM though it was a
standards working group not a collusive group of price fixers.

There is something to be said for the consequences of breaking the agreement
in the real world. In the classroom, she gets boo'd, but if she had been
colluding with say 'the Mob' she might have to worry about something else
after breaking the agreement.

This also doesn't take into account:

* Industries where the people at the top are part of an 'old boys club'

* An Industry were the conservative move is to collude and let the marketplace stagnate.

* In the classroom example, she had nothing to lose. She probably didn't even really care about the $20 or not. Whereas in the real world, people like guarantees. If a collusion agreement with players that you feel you can trust gets you a better guarantee than striking out on your own it's an attractive prospect.

* It could put a 'black mark' on you with other key players in your industry to play on their trust like that. Which could be a bad thing.

* This excludes collusion to to exclude a player. (e.g. the rumor that companies were going to break the FCC spectrum auction rules in an attempt to make sure that Google didn't get anything because it seemed that their plans were commoditize the industry.)

~~~
jimmybot
Yup, repeat games are a different situation that may lead to different
outcomes. If you can enforce the agreement, it's a different kind of game.

But then consider situations where information is unreliable:

\- Cheating because you can't trust others not to cheat, i.e. to protect
yourself, and everyone ends up cheating, as in Prisoner's Dilemma.

\- In a lot of situations, you may not even know who is cheating and by how
much, but you might be sure _someone_ is cheating. This will feed back into
your own incentives to cheat. I believe OPEC suffers from this a lot.

~~~
pyre
> _In a lot of situations, you may not even know who is cheating and by how
> much, but you might be sure someone is cheating. This will feed back into
> your own incentives to cheat. I believe OPEC suffers from this a lot._

In situations like OPEC, it's also really different. You don't have everyone
on an equal footing like in the classroom game.

If Venezuela can only produce 1 barrel/day and Saudia Arabia can produce 50
barrels/day, it doesn't matter how cheaply Venezuela prices their barrel. But
oil is also a market where the appetite of the consumer severely outstrips
availability. As long as you can produce large quantities of oil you can
pretty much name your price (so long as that's large quantities _in relation_
to other producers).

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patio11
I am reminded of my favorite description of behavioral economics: "A field of
academic inquiry into what college students will do when faced with making
economic choices outside their personal experience."

~~~
mahmud
It always cracks me up when I read a research paper with a new definite answer
on human sexuality and find they used college kids as test subjects :-D

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te_platt
This is just a variation of a very interesting game Douglas Hofstadter
describes in Metamagical Themas (extremely highly recommended by the way) in
the section on psychological number games. In his game 10 people are allowed
to choose "yes" or "no" without knowing what other people chose. If everyone
picks "yes" everyone gets $100. If anyone picks "no" then anyone picking "no"
gets $10 and everyone else get $0.

He describes inviting 10 of his friends he considers very smart, tells his
friends they will be playing with other smart people, then expresses dismay
when all his friends pick "no".

My sorry description here doesn't do the story justice. Very worth the time to
track down a copy of the book.

~~~
patio11
This boils down to asking "I'm going to put you in a room with ten peers. Do
you believe at least one of your peers will either be irrational, or believe
that a peer (possibly you) would be irrational?"

All ten people reached the correct conclusion!

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mavelikara
I think real life markets are much different than this experiment because:

1) Repeated trials in the game lets past loosers punish past winners (i.e.
Ashley will get more than boos in subsequent trials).

2) Players get to observe the world better in real world than what secret bids
in this game allows.

I am still unconvinced that collusion and price fixing is difficult as the
title suggests.

~~~
cwan
OPEC, probably the most famous example of a cartel, is notorious for having
members "cheat".

~~~
hristov
And yet they are completely capable of raising oil prices by merely sending
out a press release or two.

~~~
lupin_sansei
They lost the ability in the 80s really. Too much non-Opec oil around now. And
it hurt Opec in the long term as oil usage got much more efficient after the
oil shocks

<http://www.wtrg.com/opecshare.html>

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hristov
Wish that was true but in real life collusion is much easier to maintain. For
example, a collusion deal usually entails higher prices which means that to
benefit of cheating one has to lower prices and make money on volume.

But sometimes it is not as easy to make money on volume. Often you need time
and capital investments to increase volume. But if the other colluding
companies see you making the capital investments to get higher volume they
will know you are planning to cheat and they will drop their agreement as
well. At that point you get no sales advantage of cheating and yet you have
spent a lot of money making to create the goods for an expected sales
increase. Oh, and everyone else in industry hates your guts.

So sometimes in the real world it is much easier for an executive to collude
and pocket his/her bonus than to compete.

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chrischen
I don't see how the example applies to all cases of price fixing. If two gas
stations next to each other decided to fix their price, and one all of a
sudden decided to lower their price, then that would only give a temporary
gain. If they stick to fixing the price however, they both will gain until a
journalist muckrakes them.

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yannis
Real world oil companies collusion <http://www.cyprus-
mail.com/news/main.php?id=48041> (was on holiday here and just read this in
the paper version of the paper)

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adatta02
I played an identical game a few years ago. Someone went ahead and bid $100
for the $20. Models work fine as long as "rational" behavior is a worthwhile
assumption.

~~~
cwan
Recent studies in behavioural economics (and also the winner of the Nobel in
Economics a few years ago) suggest that rational isn't a necessary
precondition - you just need some players who are rational/have knowledge.
Sure it causes short term fluctuations but in the long run, you get to the
same answer/price.

