1) Assume that there are five oligopolists in the national carpet manufacturing

Question

1) Assume that there are five oligopolists in the national carpet manufacturing industry and they collude in a cartel arrangement to act as a collective monoply. Explain for each of the following circumstances whether collusion likely to break down and why? (Hint: consider also alternative scenarios if needed)...........................................

      (a) A very large number of new carpet sellers enter the market.........................

      (b) One of the oligopolists develops a new cost saving technique of producing carpets.......

      (c) Some of the oligopolists in the cartel stop respecting the output quotas and raise their production.....        

      (d) The demand for carpets falls....................................................................

Explanation / Answer

(a) A very large number of new carpet sellers enter the market.

Solution: The collusion of the oligopolists would break down because the new entrants in the market are selling their products at a reduced cost, thus taking the consumers away from the oligopolists and also putting pressure to reduce their prices

(b) One of the oligopolists develops a new cost saving technique of producing carpets.

Solution: The collusion is unlikely to break down if one of the firms develops a new cost saving technique because the firms will now be saving money and are still able to produce the same amount at a reduced cost. Thus, the oligopolists’ profits inflate even more

(c) Some of the oligopolists in the cartel stop respecting the output quotas and raise their production.

Solution: The collusion of the oligopolists would break down because if few firms are not giving any regard to the quotas then will result a surplus of product and the firms will have to reduce the prices in order to get rid of the surplus that was produced

(d) The demand for carpets falls.

Solution: The collusion will remain the same if the demand for carpet falls. But all producers will have to decrease their prices in order to increase the demand and earn profit or break even

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