An Agreement Among Members Of An Oligopoly To Illegally Set Prices

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A true duopoly is a specific type of oligopoly in which there are only two producers in a market. There are two major duopoly models: Cournot Duopoly and Bertrand Duopol. If the oligopolists pursued their own interests individually, they would then produce a total greater than the monopoly quantity, and would demand a price below the monopoly price, thus making a lesser profit. The promise of greater gains encourages oligopolies to cooperate. However, the oasis of collusion is inherently unstable, as the most efficient companies will be tempted to break ranks by reducing prices in order to increase their market share. Whether cartel members choose to defraud the cartel depends on the fact that the short-term revenues from the fraud outweigh the long-term losses resulting from the eventual bankruptcy of the cartel. It also depends in part on the difficulty for companies to monitor compliance with the agreement by other companies. If surveillance is difficult, it is likely that a member will get away with fraud for longer; Members would then be more likely to cheat and the agreement would be more unstable. Like the prisoner`s dilemma, cooperation in an oligopoly is difficult to maintain, because cooperation is not in the best interests of the various actors. However, the collective bottom line would be improved if companies cooperated and were thus able to maintain low production, high prices and monopolistic profits.

OPEC: In the 1970s, OPEC members successfully agreed to reduce global oil production, resulting in increased profits for member countries. A traditional example of game theory and the prisoner`s dilemma in practice are soft drinks. Coca-Cola and Pepsi compete in an oligopoly and are therefore very competitive against each other (since they have limited other competitive threats). Given the similarity of their products in the soft drink industry (i.e. different species of soda), any price differential of a competitor is considered an act of non-compliance or betrayal of an established status quo. Members of an oligopoly may also face a prisoner dilemma. If each of the oligopolists participates in the humiliation of production, high monopoly gains are possible. However, each oligopolist must be concerned that other companies, while curbing production, are using the high price by increasing production and making higher profits. Table 4 shows the inmate`s dilemma for a two-year-old oligopoly, known as a duopoly. If companies A and B agree to maintain production, they act together as a monopoly and earn $1,000 each.

However, the dominant strategy of the two companies is to increase production, each making $400 in profits. 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.