In an Oligopoly with a Collusive Agreement

Product differentiation, which is at the heart of monopolistic competition, can also play a role in the creation of oligopolies. 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 competing with, say, Coca-Cola or Pepsi is not that producing soft drinks is technologically difficult, but rather that creating a brand name and marketing efforts that match Coca-Cola or Pepsi is a huge task. Companies in an oligopoly can increase their profits through collusion, but collusive deals are inherently unstable. Oligopolistic companies were called «cats in a bag,» as mentioned in this chapter. French detergent manufacturers have decided to «get comfortable» with each other. The result? A restless and weak relationship. When the Wall Street Journal reported on the case, he wrote: «According to a statement made by a Henkel executive to the Commission [of the French cartel], detergent manufacturers wanted to `limit the intensity of competition between them and clean up the market.` Nevertheless, a price war broke out between them in the early 1990s. During soap managers` meetings, some of which lasted more than four hours, complex pricing structures were established. «One [soap] manager remembered `chaotic` meetings where each side was trying to figure out how the other had circumvented the rules.» Like many cartels, the soap cartel collapsed due to the very strong temptation for each member to maximize their own individual profits. A second example of a game is deciding whether or not to produce natural beef. Natural beef is generally defined as beef produced without antibiotics or growth hormones.

The definition is difficult because it means different things to different people and there is no common legal definition. This game is shown in the figure (PageIndex{2}), in which Cargill and Tyson decide whether or not to produce natural beef. Keeping prices and production at the oligopolistic level is therefore a collective problem of action that can be modeled in the same way as a «prisoner`s dilemma» game. In the prisoner`s dilemma game, there is a strictly dominant strategy to deviate from cooperation, and therefore the agreement should fail. However, collusion can be maintained, just as collective action can be maintained in prisoner dilemma situations. If the game is repeated, the popular expression predicts that cooperative solutions are possible. If a company finds that all other companies maintain high prices and restrict production, it can do the same. Collusion is therefore easier in markets with fewer companies and where the price of the commodity is easily measured by all companies. Therefore, collusion is much easier in new car markets, especially when companies control the outlets of their cars, than in fresh fruit markets. The dominant business model is shown in (PageIndex{4}). The supply curve for marginal firms is indicated by (S_F) and the marginal cost of the dominant firm is (MC_{dom}).

Remember that the marginal cost curve is the supply curve of the company. The dominant company has the advantage of reducing costs through economies of scale. Below, the dominant firm will set a price that marginal firms will allow to produce as much as they want, and then find the quantity and price maximising profits with the rest of the market. Payment = Value associated with possible outcomes. Because of the complexity of the oligopoly, which is the result of interdependence between firms, there is not a single generally accepted theory about the behavior of oligopolies, as we have theories for all other market structures. Instead, economists use game theory, a branch of mathematics that analyzes situations where players have to make decisions and then receive payments based on what other players are doing. Game theory has found many applications in the social sciences, as well as in economics, law, and military strategy. The balance in the dominant strategies for the prisoner`s dilemma is ((text{CONF, CONF})).

This is an interesting result, because each prisoner receives sentences of eight years in prison: ((8, 8)). If only they could cooperate, they could both be better off with much lighter three-year prison sentences. A cartel is a formal collusive agreement between companies with the aim of increasing their profits. Many real oligopolies, driven by economic change, legal and political pressures, and the egos of their senior executives, are going through episodes of collaboration and competition. If oligopolies could maintain cooperation with each other in terms of production and prices, they could make profits as if they were a single monopoly. However, any company in an oligopoly has an incentive to produce more and gain a larger share of the overall market. When companies start to behave in this way, the outcome of the market can be similar to that of a highly competitive market in terms of price and quantity. The task of public competition policy is to unravel these various realities and to try to promote behaviour that is beneficial to society as a whole and to prevent behaviour that contributes only to the profits of a few large companies without bringing consumers any corresponding advantage. Monopoly and antitrust policy examines the sensitive judgments that fall into this task. For example, game theory may explain why oligopolies struggle to maintain collusive agreements to make monopolistic profits. While companies collectively would do better to cooperate, each sole proprietorship has a strong incentive to cheat and underlist its competitors to increase its market share.

Because the incentive to defect is strong, companies can`t even make a collusive deal if they don`t think there`s a way to effectively punish defectors. Overflow is another important deterrent against collusion. A company that initially agrees to participate in a collusive agreement may defect to overflow and undermine the profits of the remaining members. In addition, the company with deficiencies can act as a whistleblower and report the agreement to the competent authorities. Many purchases made by individuals in the retail trade are produced in markets that are neither perfectly competitive, nor monopolistic, nor monopolistically competitive. Rather, they are oligopolies. Oligopoly occurs when a small number of large companies have all or most of the turnover of an industry. Examples of oligopoly abound and include the automotive industry, cable television, and commercial air transport. Oligopolistic companies are like cats in a bag.

They may scratch or cuddle and make friends. When oligopolies compete fiercely, they can end up behaving like perfect competitors, reducing costs and leading to zero profit for everyone. When oligopolies conspire with each other, they can effectively act as a monopoly and succeed in driving up prices and making consistently high profits. Oligopolies are usually characterized by interdependence, in which various decisions such as production, price, advertising, etc. depend on the decisions of the other company(s). The analysis of the decisions of oligopolistic undertakings with regard to prices and quantity produced involves taking into account the advantages and disadvantages of competition in relation to agreements at a given time. Collusion, secret agreements and cooperation between interested parties for fraudulent, fraudulent or illegal purposes. In the United States, collusion is an illegal practice that significantly prevents its use. Antitrust laws aim to prevent collusion between companies.

As a result, it is complicated to coordinate and execute a consultation agreement. In addition, in industries that are subject to strict oversight, it is difficult for companies to participate in collusion. An oligopoly is a situation in which a few companies sell most or all of the goods in a market. Oligopolies earn their highest profits when they can unite as a cartel and act as a monopolist by reducing production and raising prices. Since each member of the oligopoly can individually benefit from the expansion of production, such agreements often collapse – especially since explicit agreements are illegal. Like the prisoner`s dilemma, it is difficult to maintain cooperation in an oligopoly because cooperation is not in the best interests of individual actors. However, the collective result would be improved if the companies cooperated and were thus able to maintain low production, high prices and monopoly profits. Members of an oligopoly may also face a prisoner`s dilemma. If each of the oligopolies cooperates to keep production low, then high monopoly profits are possible. .