Whether cartel members choose to cheat the agreement depends on whether the short-term proceeds of the fraud outweigh the long-term losses resulting from the eventual collapse of the cartel. It also depends in part on how difficult it is for companies to verify whether the agreement is being respected by other companies. If monitoring is difficult, a member is likely to get away with fraud for longer; Members would then be more likely to cheat, and the cartel would be more unstable. Cournot`s model, in which firms compete for production, and Bertrand`s model, in which firms compete on price, describe the duopolistic dynamic. The actual height of these barriers varies. Three approximate levels of difficulty can be distinguished when entering an industry: blocked entry, which allows established sellers to set monopoly prices if they wish, without having access to them; market entry hampered by the market, which allows incumbent sellers to increase their selling prices above the minimum average cost, but not as high as the price of a monopolist without attracting new sellers; and an easy entry that does not allow incumbent sellers to increase their prices above the minimum average cost without attracting new entrants. Overflow is another important deterrent against collusion. A company that initially agrees to participate in a collusive agreement may defect to overflow and undermine the profits of the remaining members. In addition, the company with deficiencies can act as a whistleblower and report the agreement to the competent authorities. Unlike price fixing, price leadership is a type of informal collusion that is usually legal. Price leadership, sometimes referred to as parallel pricing, occurs when the dominant competitor publishes its price ahead of other companies in the market and the other companies then adjust the advertised price.
The market leader usually sets the price to maximize its profits, which may not be the price that maximized the profits of other companies. In the United States, collusion is an illegal practice that significantly prevents its use. Antitrust laws aim to prevent collusion between companies. As a result, it is complicated to coordinate and execute a consultation agreement. In addition, in industries that are subject to strict oversight, it is difficult for companies to participate in collusion. In an oligopoly, companies are interdependent; They are affected not only by their own decisions about how much to produce, but also by the decisions of other companies in the market. Game theory provides a useful framework for thinking about how companies can act in the context of this interdependence. Specifically, game theory can be used to model situations where each actor must also consider how the others might react to that action when deciding on an action plan. Suppose there are two companies in the toaster market with a specific demand function. Company A determines the performance of Company B, keeps it constant and then determines the rest of the market demand for toasters. Company A then determines its production maximizing profits for this residual demand, as if it were the entire market, and produces accordingly.
Company B will simultaneously perform similar calculations in relation to Company A. Entente, an association of companies or independent individuals for the purpose of exercising any form of restrictive or monopolistic influence on the production or sale of a commodity. The most common regulations are aimed at regulating prices or production or dividing markets. The members of a cartel retain their own identity and financial independence while participating in a common policy. They have a common interest in exploiting the monopoly position that can be maintained by the merger. Combinations of cartel-like forms emerged at least as early as the Middle Ages, and some authors claim to have found evidence of cartels as early as ancient Greece and Rome. Several factors deter collusion. First, pricing is illegal in the United States, and antitrust laws are in place to prevent collusion between companies. Secondly, coordination between undertakings is difficult and becomes all the more difficult the greater the number of undertakings concerned.
Third, there is a threat of overflow. A company can agree to agree and then break the agreement, thus undermining the profits of the companies that still keep the agreement. Finally, a company can be deterred from collusion if it is not able to effectively punish companies that might break the agreement. OPEC: OPEC`s oil-producing countries have sometimes worked together to raise global oil prices to ensure a stable income. Perhaps the best-known and most effective cartel in the world is OPEC, the Organization of the Petroleum Exporting Countries. In 1973, OPEC members reduced their oil production. As middle Eastern crude oil was known to have few substitutes, OPEC members` profits soared. From 1973 to 1979, the price of oil rose by $70 a barrel, an unprecedented figure at the time.
In the mid-1980s, however, OPEC began to weaken. The discovery of new oil fields in Alaska and Canada has led to new alternatives to Middle Eastern oil, leading to lower OPEC prices and profits. Around the same time, OPEC members also began cheating to increase individual profits. Collusion can take many forms between different types of markets. In each scenario, the groups together gain an unfair advantage. One of the most common ways of collusion is pricing. Pricing occurs when there are a small number of companies in a given utility market, commonly referred to as an oligopoly. This limited number of companies offer the same product and form an agreement to set the price level. Prices may be forcibly lowered to drive out smaller competitors, or they may have an inflated level to support the interests of the group that is detrimental to the buyer. Overall, price fixing can eliminate or restrict competition while creating even higher barriers for new entrants.
The main justification normally invoked for cartels is protection against «ruinous» competition, which would lead to the profits of the industry as a whole being too low. The formation of the cartel is intended to ensure that fair shares of the overall market are distributed among all competing undertakings. Among the most common practices of cartels to maintain and enforce the monopoly position of their industry are the fixing of prices, the allocation of sales quotas or exclusive distribution territories and production activities between members, the guarantee of a minimum profit for each member and agreements on conditions of sale, discounts, rebates and conditions. While game theory is important for understanding fixed behavior in oligopolies, it is generally not necessary to understand competitive or monopolized markets. In competitive markets, companies have such a small individual impact on the market that there is simply no need to consider other companies. A monopolized market has only one company, and therefore no strategic interaction takes place. Industries differ in terms of how easily new sellers can get in. Barriers to entry consist of the advantages that sellers already established in an industry have over the potential new entrant.
Such a barrier is usually measurable by the extent to which established sellers can permanently increase their selling prices beyond the minimum average cost without attracting new sellers. Barriers may exist because costs to incumbent sellers are lower than those of new entrants, or because incumbent sellers may charge higher prices to buyers who prefer their products to those of potential new entrants. .
