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Explain very briefly what factors determine whether a cartel,or collusive oligopoly, can exist or succeed.

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Introduction

(i) Explain very briefly what factors determine whether a cartel,or collusive oligopoly, can exist or succeed. Oligopolistic market has a relatively small number of competing firms. In such field, every firm's output and pricing decisions are likely to have a major effect on its rivals. every firm is interdependence to each others. It can be seen if an individual firm embarks an increase in output or reduction in price. The sales of its rivals will suffer a big impact, and then they are likely to react. Prior to it is impossible for firm to act independently of each other. a firm need try and predict how rival firms are going to react which causing uncertainty and makes it complicate to plan for the future. So it provokes firms to work on together to reduce the uncertainty. They might agree to restrain their independent decision making. Collusion that takes place in a cartel is an agreement made by a number of independent firms to co-ordinate decisions. ...read more.

Middle

the same wholesale price and offering similar discount for within a geographic region which can be seen they worked as a cartel. It is because cartel members can have an agreement and divide up the market between them and agreeing not to sell in each other's designated area. This enables each firm to set prices knowing that its 'rivals' will not undercut them. A market-sharing cartel may be no more than an agreement among firms not to approach each other's customers or not to sell to those in a particular area. It may involve secretly allocating specific territories to one another or agreeing lists of which customers are to be allocated to which firms. Also cartel is likely to take place in concentrated industries and in smaller geographic areas. Though in this oligopolistic industry are selling homogeneous products (petrol), then it is easier for them to reach the price agreement. Because in this circumstances firms are less difficult to compute whether change in sales. ...read more.

Conclusion

It is easier to form a cartel in a market with inelastic demand, because the more inelastic the demand curve, the higher the price that can be set by the cartel with relatively lower reductions in quantity, in other words, it is more complex to form a cartel when the market demand is more elastic. What is more, a cartel among few firms the probability of spotting by the government is correspondingly lower and the negotiations between firms are less complicate and enforcement and monitoring costs of the cartel are low, it will be easily to form combination. Overall, low expectation of serve sanctions would be a factor that incentive oil firms gathered to collude if the cartel might not expect cartel behaviours to be easily unveiled or severely punished. All these expectations come from the legislation might not be as strict to against cartels as the government is not very effective in managing and punishing cartels or when the penalties are not too heavily Reference: MODERN ECONOMICS , MACMILLAN BUSINESS, 7TH edition, JACK HARVEY MANAGERIAL ECONOMICS Applications, Strategy and Tactics, SOUTH-WESTERN, 9TH edition, James R. McGuigan INTERNET: www.compecon.ie/oligopoly.htm www.bath.ac.uk/~mn1wl/economics%20essay.htm www.economics.tcd.ie/tep/tepno16JT23.PDF ...read more.

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