Formal Agreement Among Oligopolists

Even if oligopolists realize that they would benefit as a group by acting as a monopoly, each oligopoly faces a private temptation to produce a slightly higher quantity and make slightly higher profits – while continuing to sty as other oligopolists keep their production low and keep prices high. If at least some oligopolists give in to this temptation and start producing more, then the market price will fall. In fact, a small handful of oligopoly companies would end up competing so violently that they all end up generating zero economic profit – as if they were perfect competitors. Several factors are deterresing. First, pricing in the United States is illegal and there are antitrust laws to prevent business-to-business agreements. Secondly, coordination between companies is difficult and the number of companies involved is all the more important. Third, there is a risk of overtaking. A company may agree to meet and then break the agreement, undermining the profits of the companies that still maintain the agreement. Finally, a company may be deterred from collusion if it is not able to effectively sanction companies that could break the agreement.

Many retail purchases by individuals are made in markets that are neither totally competitive nor monopolistic. They`re more like oligopolies. The oligopoly arises when a small number of large companies have all or most of the turnover of a single sector. Examples of oligopoly are abundant and include the automotive industry, cable television and commercial air travel. Oligopolistic firms are like cats in a bag. They can either scratch each other or snuggle up and feel comfortable. If oligopolists compete hard, they end up acting very similarly to perfect competitors, reducing costs and leading to zero gains for all. When oligopolists collide, they can act effectively as a monopoly and succeed in raising prices and making constantly high profits.

Oligopolies are generally characterized by mutual interdependence in which different decisions, such as production, price, advertising, etc., depend on the decisions of other companies. The analysis of oligopolistic business decisions regarding pricing and the quantity produced must take into account the advantages and disadvantages of competition over cartels at a given time. In many other Western countries, formal collusion agreements (often called cartels when they are broad in scope) are legal.

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