| In one of my previous articles, I’ve tried to | | | | which is nothing but the aggregate demand curve of |
| portray that Uncertainty is the most important factor in | | | | the consumers. The Marginal Revenue curve of the |
| the studies of Oligopoly.( | | | | cartel will show the addition to cartel’s revenue |
| So, due to its own virtue, setting prices independently is | | | | for successive additions to its output and sales. The |
| very rare or almost non-existent in the oligopolistic | | | | Marginal Cost curve of the cartel can easily be got by |
| markets. Some kind of understanding between the | | | | horizontally adding the marginal cost curves of the |
| firms arises, may be either in the form of a formal | | | | individual firms. Now, the cartel will maximize its joint |
| agreement or even in a tacit way. A formal | | | | profits by fixing the industry output at the point where |
| agreement is one when the oligopolists agree after | | | | the marginal revenue and marginal cost curves |
| discussion to observe certain common rules of | | | | intersect each other. |
| conduct in regard to price and output determination. So | | | | But in reality the existence of the so called |
| this kind of an oligopolistic situation is generally termed | | | | ‘perfect cartel’ is quite rare. In most of |
| as Collusive Oligopoly. But more often we find that the | | | | the cases, cartels are found to be ‘loose’ |
| agreement between the firms is a tacit one, as in most | | | | and in those cases, the distribution of profits and |
| of the countries a formal or open agreements to form | | | | fixation of outputs of individual firms are not |
| monopolies are illegal. | | | | determined in a manner perfect cartels do. Generally a |
| Collusions can be of two major types: | | | | market sharing approach gets generated and it may |
| A. Cartels | | | | work in two different manners: |
| B. Price Leadership | | | | 1. Market Sharing by Non Price Competition: Here only |
| In this article I’m concentrating on Cartels only. In | | | | a uniform price is set and the member firms are free |
| a Cartel type of collusion, firms jointly fix a price and | | | | to produce and sell amount of outputs which will |
| output policy through agreements. Basically, the term | | | | maximize their individual profits. Though the firms agree |
| ‘cartel’ was used for the agreement in | | | | not to sell products below a certain floor level, but they |
| which there existed a common agency which alone | | | | are free to vary the style of their products and |
| undertook the selling operations of all the firms that | | | | advertising expenditure and to promote sales in the |
| were party to the agreement. But now-a-days all | | | | other ways. |
| types of formal and informal agreements reached | | | | 2. Market Sharing by Quota: Here the member firms |
| among the oligopolistic firms of an industry are known | | | | agree regarding the quota of output to be produced |
| as Cartels. | | | | and sold by each of them at the agreed price. |
| Formal collusion or agreement among the oligopolists | | | | It is worth mentioning that the all types of cartels are |
| may itself take a various forms. An extreme form of | | | | unstable, when there exists cost difference between |
| collusion is found when the member firms agree to | | | | the firms. The low cost firms always have the |
| surrender completely their rights of price and output | | | | tendency to reduce the price of the product to |
| determination to a ‘Central Agency’, so | | | | maximize their profits which ultimately result in the |
| as to secure maximum ‘joint profits’. This | | | | collapse of the collusive agreement. Again, if the entry |
| type of cartel is treated as the ‘perfect | | | | of the firms in the oligopolistic industry is free, the |
| cartels’. | | | | instability of the cartels is intensified as the new |
| Let us take a closer look into the mechanism of | | | | entrants may not join the cartel and may fix a lower |
| working of a ‘perfect cartel’. Let us | | | | price of the product to sell a larger quantity. This |
| assume that there are two firms who have formed a | | | | means that the stability of the cartel agreement is |
| perfect cartel by entering the industry with an | | | | always in danger and it again shows the Uncertainty is |
| agreement to maximize the joint profit. Here, the cartel | | | | the very basic nature of Oligopoly. |
| will firstly estimate the demand curve of the industry | | | | |