Oligopolies may produce the same good or a differentiated product. The key disti

Question

Oligopolies may produce the same good or a differentiated product. The key distinction between oligopoly and other market structures is that there is a strategic interdependence between the firms in the market. Usually there are only a few firms in an oligopoly, but sometimes there are many, with a few very large ones that can exert some control over the market price.

a. The firms in an oligopoly would find it advantageous to form a cartel. What is a cartel? What price would the cartel charge? That is, would they charge and price closer to what a monopolist would charge, or closer to the price that would prevail in a competitive market? Why?

b. Cartels are difficult to form and maintain. Why is this? Even if they are legal (they are not in the U.S.), what would make it difficult for the firms to cooperate? Under what circumstances is the cartel more likely to be successful? give at least two difficulties.

C. Briefly describe at least one strategy a firm could use to encourage cooperation among the other firm(s) in their cartel.

d. Can oligopolies be efficient? Why or why not?

Explanation / Answer

A cartel is an agreement between competing firms to control prices or exclude entry of a new competitor in a market. It is a formal organization of sellers or buyers that agree to fix selling prices, purchase prices, or reduce production using a variety of tactics.

To maximize profit they limit the supply of goods in the market and charge higher prices. The cartel price is determined by market demand curve at the level of output chosen by the cartel.Like a monopolist, it will choose to produce less output and charge a higher price than would be found in a perfectly competitive market.

There are successful cartels such as OPEC. But  the biggest challenges cartels face are entry and adjustment of the collusive agreement in response to changing economic conditions. Difficulties can be categorised as 1)selecting and coordinating the behavior of all cartel participants on mutually consistent, collusive strategies; second, monitoring the behavior of cartel participants to detect and deter defections from these collusive strategies; and third, preventing entry (or expansion) by noncartel firms.

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