Cooperative Oligopoly
Monopoly vs. Competitive Outcome
Price
Marginal cost
Monopoly
Price
Competitive
price
MR
0
Monopoly
Quantity
Demand
Competitive
Quantity
Quantity
Monopoly Profit > Competitive Profit
Price
Marginal cost
Monopoly
Price
Competitive profit
Average total cost
Average
total cost
Demand
Marginal revenue
Q monopoly
Quantity
Firms cooperate to produce monopoly quantity
Industry
Firm
Marginal
Cost
Marginal Cost
Monopoly
price
Average Cost
Demand
Marginal
Revenue
Monopoly
Quantity Qm
Firm quantity
qm = Qm/n
Factors that facilitate collaboration
• Few firms in industry
• Relatively inelastic demand
• Relatively homogenous product
• Existence of a trade association
• Low expectation of severe punishment
Examples of cooperative oligopolies
Beer
Switch-gear
€272 million fine to
Heineken, Grolsch,
Bavaria
€750 million fine to
Siemens,Alstrom,
Toshiba, Mitsubishi.
Vitamin pills
$1 billion fine to
Roche (CH), BASF
(Germany),RhonePoulenc(France),
Takeda (Japan)
Animal Feed
$100 million fine + 3 year jail to top executives
of Archer Daniel Midland
Flat screens 液晶显示器
$585 million fine to
LG(Korea),
Sharp(Japan)
Chunghwa (China).
Cellular Telephones
Collusion ?
But individual firms have an incentive to cheat
Industry
Firm
Monopoly price > firm AC,MC
Marginal Cost
Marginal Cost
Monopoly
price
Average Cost
Demand
Marginal
Revenue
Monopoly
Quantity Qm
Firm
Quantity
qm = Qm/n
Q cheat
Methods to Prevent Cheating
• Divide the market into geographical or exclusive
areas
• Have sales agent
• Establish trigger prices