Price and Output Determination under Cartel Article shared by: Price and Output Determination under Cartel! The agreement may be either formal open or tacit secret. But since formal or open agreements to form monopolies are illegal in most countries, agreements reached between oligopolists are generally tacit or secret.
Price and Output Determination under Oligopoly! A diversity of specific market situations works against the development of a single, generalized explanation of how an oligopoly determines price and output. Pure monopoly, monopolistic competition and perfect competition, all refer to rather clear cut market arrangements; oligopoly docs not.
Other firms share the balance. It includes both differentiation and standardization. It encompasses the cases in which firms are acting in collusion and in which they are acting independently.
Therefore, the existence of various forms of oligopoly prevents the development of a general theory of price and output. The element of mutual interdependence in oligopolistic market further complicates the determination of price and output.
In-spite of these difficulties, two interrelated characteristics of oligopolistic pricing stand out: Oligopolistic prices tend to be inflexible or Sticky Price change less frequently in Oligopoly than they happen under other competitions like perfect, competition, monopoly and monopolistic competition.
When oligopolistic prices change, firms are likely to change their prices together they act in collusion in setting and changing prices. Keeping these facts in mind, the price and output determination under oligopoly is in the following situations: Price Determination in Non-Collusive Oligopoly: In this case, each firm follows an independent price and output policy on the basis of its judgment about the reactions of his rivals.
If the firms are producing homogeneous products, price war may occur. Each firm has to fix the price at the competitive level. On the contrary, in case of differentiated oligopoly, due to product differentiation, each firm has some monopoly control over the market and therefore charge near monopoly price.
Thus the actual price may fall between the two limits: Practically, there is every possibility to determine the exact price within these limits.
However there may be the following possibilities: So long as the firm earns adequate profits at the prevailing price, it may not try to change it. Any effort to change it may create uncertainties in the market. A firm will stick to that price to avoid uncertainties.
Thus the price tends to be rigid where oligopolist takes independent action. The modern economists are of the view that independent price determination cannot exist for long in oligopoly.Like monopoly, if the oligopoly is maintained in the long run, it charges a high price, produces less output and fails to maximise social welfare relative to perfect competition.
Cartel is seen by the government as a means of driving up prices and profits which is against the public interest. Like monopoly, if the oligopoly is maintained in the long run, it charges a high price, produces less output and fails to maximise social welfare relative to perfect competition.
Cartel is seen by the government as a means of driving up prices and profits which is against the public interest. ADVERTISEMENTS: Collusive Oligopoly: Price and Output Determination under Cartel! In order to avoid uncertainty arising out of interdependence and to avoid price wars and cut throat competition, firms working under oligopolistic conditions often enter into agreement regarding a uniform price-output policy to be pursued by them.
The agreement may be either formal (open) or tacit [ ]. A Kinked Demand Curve Consider a member firm in an oligopoly cartel that is supposed to produce a quantity of 10, and sell at a price of $ The other members of the cartel can encourage this firm to honor its commitments by acting so that the firm faces a kinked demand curve.
If one person lowers output and the other does not, the. A cartel is defined as a group of firms that gets together to make output and price decisions. The conditions that give rise to an oligopolistic market are also conducive to the formation of a cartel; in particular, cartels tend to arise in markets where there are few firms and each firm has a .
Oligopoly and Cartels.
Unless a monopoly is allowed to exist due to a government license or protection from a strong patent, markets have at least a few sellers. When a market has multiple sellers, at least some of which provide a significant portion of sales and recognize (like the monopolist) that their decisions on output volume will have an effect on market price, the arrangement is.