Friday, October 2, 2015

Rubber Cartel

OPEC is the most famous cartel, but there is also a cartel for rubber.  In February 2014 this group urged members to restrict output due to low rubber prices but by November of 2014 the agreement had broken down due and prices started to fall again.  This is a classic example of the prisoners dilemma.  It would be more profitable if collectively all the producers would restrict output as opposed to all the producers to increase output.  Yet, if only one were to increase output and all the others were to reduce output, then profits for the "player" who increased output would increase even more than if they reduced output; and this is true for all the players.

Thus firms can collectively increase profits if all agree to the output restriction, but individually each has an incentive to break the pledge as their profits will be greater independent of what their rival does.

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