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

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  1. 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. Interpreting to Adam Smith, The Wealth of Nations, 1776.

           

           “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices”.

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        Cartel is established and maintained by explicit collusion or tacit collusion. The purpose of the cartel is to earn monopoly profits by fixing the price and restricting output. A cartel seeks to maximise the profits of all its member firms. 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. Firms will have an incentive to stay in or join the cartel if it is difficult  to entry the market for non-member ...

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