In the game, two members of a criminal gang are arrested and imprisoned. The agreement between oligopolist are generally tacit or secret. Steel provoked so much criticism from customers and elected officials, especially President john F. Oligopoly differs from monopoly and monopolistic competition in this that in monopoly, there is a single seller; in monopolistic competition, there is quite a larger number of them; and in oligopoly, there are only a small number of sellers. Some Advertising and Quality rivalry, Administered prices Oligopoly Few producers, No differences in product.
In Collusive Oligopoly, instead of competing with each other, the firms come together and with the consensus of all fixes the price and the outputs. The firm will produce that output at which its marginal cost equals marginal revenue. The joint action of the few big firms discourages the entry of new firms into the industry. It is assumed that there are two firms which produce a homogeneous product at different costs, which clearly must be sold at the same price. It is also known as exploitative price leadership. Such secret dealings by firms to raise their own profits tend to break down the cartel.
Details, including opt-out options, are provided in the. As a matter of fact other factors on the basisof which the firms compete include advertising, product quality and other marketing strategies. When the price is Rs. Sweezy presented the kinked demand curve analysis to explain price rigidities often observed in oligopolistic markets. This implies that if price-leadership is to remain, there must be some definite market-sharing agreement tacit though it may be.
It should be stressed that for the leader to maximize his profit price must be retained at the level P A and he should sell X A. Now if the firm reduces its price below P1 say P2, the other firms operating in the market show a cooperative behaviour and follow the firm. But when there is difference in cost of production then cartel is unstable because the low cost firm will have the temptation to lower price to increase its profits. In this case many oligopolies end up selling the products at low prices or doing high advertising resulting in high costs and making lower profits than expected. A cartel is a market sharing and price fixing arrangement between groups of firms where the objective of the firm is to limit competitive forces within the market. Both players would clearly have been better off if they had cooperated. However, by lowering prices just slightly, a firm could gain the whole market.
Firms by experience may realize that independent pricing creates uncertainty and insecurity among rivals. The price is affected by the competitive structure of a market because the firm is an integral part of the market in which it operates. In certain situations, organizations under oligopoly are not involved in collusion. Barometric price leadership takes place due to the following reasons: a. Thus, most of the organizations prefer barometric price leadership. However, not colluding and charging the marginal cost, which is the non-cooperative outcome, is the only Nash equilibrium of this model. In case their cost curves differ, their market shares will also differ.
This leads to little or no gain, but can lead to falling revenues and profits. The prisoners are separated and left to contemplate their options. Firstly, rivalry between several large firms in an industry may make it impossible to accept one among them as the leader. By doing so, they voluntarily sacrifice short-run profits in order to maximize long-run profits. Hence, the dominant firm also becomes the price leader.
In the following case, there are few assumptions for determining price-output level under price leadership: a There are only two firms A and B and firm A has a lower cost of production than the firm B. Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. At an extreme, the colluding firms can act as a monopoly. If the cost of production differs, the price will be fixed by bargaining between firms keeping in view that even a high cost firm gets some profits at agreed price. This influences organizations to follow price changes made by the barometric organization, which has a proven ability to make correct forecasts.
Small output and high prices: As compared with perfect competition, oligopolist sets the prices at higher level and output at low level. The oligopolists, therefore avoid cutting price, and try to sell their products at the prevailing market price. The firm with the lowest cost will charge a lower price P A and this price will be followed by the high-cost firm, although at this price firm B the follower does not maximize its profits. Assumptions : The analysis of joint profit maximisation cartel is based on the following assumptions: 1. Oligopolistic competition can give rise to a wide range of different outcomes.