A Collusive Agreement To Fix Prices Among Firms

If the oligopolites each persecuted their own interests, they would produce a total quantity greater than the monopoly quantity and demand a price lower than the monopoly price, thus making a lower profit. The promise of greater profits encourages oligopolites to cooperate. However, collusive oligopolies are inherently unstable, as the most efficient companies will be tempted to break ranks by lowering prices to increase market share. A good example of current events is the dispute between the US competition authorities and Apple, accused of wanting to increase the price of e-books by concluding agreements with major book publishers. Game theory provides a framework for understanding how companies behave in an oligopoly. Several factors deter collusion. First, price cartels are illegal in the United States and there are antitrust laws to prevent agreements between companies. Secondly, coordination between companies is difficult and increases all the more as companies are involved. Third, there is a risk of overflow. A company can agree to enter into agreements and then break the agreement, thereby undermining the profits of the companies that still maintain the agreement. Finally, a company may be deterred from entering into a cartel if it is not able to effectively sanction companies that may be in breach of the agreement. Like the prisoners` dilemma, cooperation in an oligopoly is difficult to maintain, because cooperation is not in the best interests of the various actors. However, the collective result would improve if the companies cooperated and were thus able to maintain low production, high prices and monopolistic profits.

The oligopoly is a market structure where there are a small number of companies that manufacture a product. If there are few companies on the market, they can work together to set a price or level of production for the market, in order to maximize the profits of the industry. As a result, the price will be higher than the market compensation price and production is likely to be lower. In extreme cases, collapsing firms can play the role of monopoly and reduce their individual production, so that their collective production would be equivalent to that of a monopoly, allowing them to make higher profits. The Cournot duopoly is an economic model that describes a sectoral structure in which companies compete at the level of production. The model is based on the following assumptions: a collusive agreement to set prices between companies in an oligopolistic sector is most likely to be broken under which of the following conditions? While game theory is important for understanding corporate behavior in oligopolies, it is generally not necessary to understand competitive or monopolized markets….