South-Western College Publishing - Economics  
Cheaters sometimes win, and winners sometimes cheat
Topic Oligopoly
Subject cheating and honesty in business
Key Words cheating, hidden cost, honesty, reputation-building
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Reference ID: A134919409

News Story Can honest people survive in a competitive world? In some cases they can't; in others, they most definitely can. It all depends upon other people's behavior.

Consider a sprinter--or anyone else in competitive sports--who can expect at least a few fellow competitors to be cheating, perhaps by using performance-enhancing drugs. Does the sprinter gain anything by being honest? No. In fact, the person could be hurt by being honest, not cheating at all, and losing the race.

In contrast, consider the competitive world of business. Can you expect others to cheat there, even if the probability that they will be caught is very low? Perhaps yes; but perhaps not. What if honesty is a desirable quality in promotion to a new position? Someone with the reputation of a cheater, liar, etc, will be passed over for that promotion. Others, with reputations for honesty will survive, and even thrive, in instances in which honesty is a requirement for working steadily up the ladder of responsibility.

Questions
1. How would you describe the opportunity cost of cheating in any particular vocation?
2. How is cheating in sports a prisoner's dilemma? Why is it different in business?
3. If it is optimal for an individual to not cheat in business because of the need to create a reputation for honesty, why are OPEC nations, which are effectively oil businesses, so prone to cheating on each other? What is the difference between individual behavior and its rewards and oligopoly and its rewards for honesty?
Source Robert Frank. "There's a hidden price for being a cheat." The New York Times Online, 4 August 2005.

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