Why Might Oligopolistic Firms Be Tempted To Enter Into A Cartel Agreement

Since oligopolists cannot sign a legally enforceable contract to act as a monopoly, companies can instead closely monitor what other companies produce and calculate. Alternatively, oligopolists can choose to act in such a way that each company under-pressure to stick to its agreed production volume. In the United States and many other countries, it is illegal for companies to meet because collusion is anti-competitive behaviour, which is a violation of cartel and abuse of dominance rules. Both the Department of Justice`s Department of Understanding and the Federal Trade Commission are responsible for preventing cartels in the United States. The prisoner`s dilemma shows why two people could not work together, even if collectively it is in their best interest to do so. Suppose there are two companies in the toaster market with some demand function. Company A will determine the production of Company B, keep it constant and then determine the rest of the market demand for toasters. Company A will then determine its increasingly profitable production for these residual needs, as if it were the entire market, and produce accordingly. Company B will simultaneously perform similar calculations in relation to Company A. The result of this ownership dilemma is often that, although A and B could achieve the highest combined profits by cooperating in the production of a lower level of production and acting as a monopoly, both companies could find themselves in a situation where they could each increase their production and earn only $400 in profits at a time. Clear It Up looks at a cartel scandal in particular.

Cournot duopoly is an economic model that describes an industry structure in which companies compete at the production level. The model makes the following assumptions: While game theory is important for understanding firm behaviors in oligopolies, it is generally not necessary to understand competitive or monopolized markets. In competitive markets, companies have such a small individual impact that taking other companies into account is simply not necessary. A monopolized market has only one company, so there are no strategic interactions. Most agreements are difficult and tense, and some agreements are completely collapsing. The amount requested on the market can also be two or three times greater than the amount needed to produce at least the average cost curve – meaning that the market would only have room for two or three oligopolies companies (and they do not need to manufacture differentiated products). Again, small businesses would have higher average costs and would not be able to compete, while other large firms would produce such a large quantity that they could not sell them at a cost-effective price. This combination of scale demand and market demand creates the barrier to entry that led to the Boeing-Airbus oligopoly for large passenger aircraft.

Monopoly competition is probably the most common market structure in the U.S. economy. It strongly encourages innovation, as companies try to make short-term profits, while market entry is that companies do not make long-term economic benefits.