Oligopoly
Oligopoly: Few Sellers
VS.
(Single and clustered prices respectively.)
Oligopoly: Few Sellers
Principal characteristic:
Interdependence
Great uncertainty facing the oligopolist is the result. Any policy
action will elicit a reaction from competitors; hence, the
uncertainty. Analytical precision, therefore, is impossible, and
many oligopoly models have been developed. There is no
general theory, and the kinked case is but one model.
Theory of Cartels
Interdependence and Uncertainty
The centralized cartel is the case of centralized
decision making, with the organization determining
price and output quotas.
Objectives:
1) minimize industry costs for any given output (produce where
all firms have the same MC).
2) restrict output and maximize industry-wide profits. Sum
MXC curves to find industry-wide S curve. Equate that to MR,
and sell from the related demand curve. Each firm produce the
quota where short-run industry MC = industry MR
Motivations for Collusion
a) Decrease competition, achieve monopoly-like behavior
b) Decrease uncertainty
c) Decrease ease of entry
Case of the centralized cartel...
(perfect collusion)
Collusion
Decision making is carried on by the central organization. It sets
price and output. (The ideal case is illegal in the U.S. and seldom
reached, probably, elsewhere.)
Firm A
Firm B
Industry
$
$
$
MCa
MC
ACa
MCb
ACb
MR
0
Qa
X
0
Qb
X
0
Qc
Objective: Minimize industry costs for any given output. Allocate
quotas to members so the MC of each producing firm at its quota
output is equal to MC of every other firm.
D
X
Theory of Cartels
The key to a very high price is the inelasticity of demand.
The cartel’s inelastic demand depends upon:
 world Ed for the product
 E of supply of competing non-cartel producers
 the cartel’s share of the world market
A successfully high price starts all these factors gradually
working against the cartel. The world searches for substitute,
non-cartel producers to try to increase supplies and decrease the
cartel’s market share.
Motivation for Independent
Action
If a single firm can successfully break away from the cartel, and
gain more customers by lowering price and increasing sales
beyond its former quota, it increases profits. If everybody breaks,
the old pre-cartel problems reappear.
$
Firm A
$
MCa
Firm B
$
Industry
MC
ACa
MCb
ACb
D
MR
MR
0
Qa Qa
X
0
Qb
X
0
Qc
D
X
International Cartels
Cartels: Collusion among oligopolists--agreement to
restrict selling competition.
Centripetal and centrifugal forces of cartels-reason for their expected short mortality.
OPEC was slow in validating
that prediction.