A Formal Agreement Among Firms

In an oligopoly, will companies act more like a monopoly or more like competitors? Explain for a moment. Assuming both companies know the payments, what is the likely outcome in this case? Can the two companies trust each other? Consider the situation of Company A: companies that present themselves as whistleblowers can obtain immunity from sanctions. So if two companies work together, there is an incentive to be the first to blow the whistle and give information to the OFT. Agreements occur when competing companies agree on cooperation โ€“ for example.B set higher prices to generate higher profits. The deal is a way for companies to make higher profits at the expense of consumers and reduce market competitiveness. Product differentiation at the heart of monopolistic competition can also play a role in creating an oligopoly. For example, businesses may need to reach a certain minimum size before they can spend enough on advertising and marketing to create a recognizable brand name. The problem with competing with Coca-Cola or Pepsi, for example, is not that the production of soft drinks is technologically difficult, but rather that creating a brand and marketing efforts equated with Coke or Pepsi is a huge task. An example of the pressure these firms can exert on each other is the folded demand curve, in which competing oligopoly companies commit to cutting prices, but not raising prices.

[link] shows this situation. Assuming that an oligopolis airline has agreed with the rest of a cartel to provide a quantity of 10,000 seats on the New York-Los Angeles route for $500. This choice defines the elbow in the company`s perceived demand curve. The reason why the company is facing an elbow in its demand curve is explained by the reaction of other oligopolists to the company`s price changes. If the oligopoly decides to produce more and reduce its price, the other members of the cartel will immediately respect all price decreases – and therefore a lower price will only bring a very small increase in the quantity sold. Although in many parts of the world it is illegal for companies to set prices and establish a market, the temptation to make higher profits makes it extremely tempting to oppose the law. Members of an oligopoly may also face a prisoner`s dilemma. If each of the oligopolites works together to keep production low, then high monopoly profits are possible.

However, any oligopoly must be concerned that other firms, while keeping production low, take advantage of the high price by increasing production and making higher profits. [link] shows the prisoner`s dilemma for a two-stranded oligopoly โ€” known as a duopoly. If companies A and B agree to keep production low, they will act together as a monopoly and earn $1,000 each. However, the dominant strategy of both companies is to increase production, in which case each will gain 400 $US. In the example below, a competitive sector will have the competitive P1 and Q price. If companies agree, they can limit production to Q2 and increase the price to P2. Agreements usually include some form of agreement to obtain higher prices. This may include: An oligopoly is a situation in which a few companies sell most or all of the goods in a market. Oligopolists earn their highest profits if they can unite as a cartel and act as a monopoly by reducing production and raising the price. As each member of the oligopoly can individually benefit from an increase in production, such collusion often collapses โ€“ especially since explicit cartels are illegal. .

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