Oligopolistic companies partner with a cartel to increase their market power and members work together to jointly determine the level of production of each member and/or the price each member will charge. Cooperation allows cartel members to behave like a monopoly. If z.B. each company sells an undifferentiated product such as oil in an oligopoly, the demand curve that each company faces will be horizontally at market price. However, if oil producers form a cartel like OPEC to determine their production and price, they will collectively face a declining market demand curve, as will a monopoly. In fact, the decision to maximize the profits of the cartel is the same as that of a monopoly, as Figure shows. Cartel members choose their combined production at the level where their combined marginal income corresponds to their common marginal costs. The price of the agreement is determined by the market demand curve at the level of production chosen by the agreement. The gains of the agreement correspond to the area of the rectangular box, called abcd in the figure. Note that a cartel such as a monopoly will choose to produce less production and demand a higher price than could be found in a fully competitive market. Once created, cartels are difficult to maintain. The problem is that cartel members will be tempted to defraud their production limitation agreement.
By producing more production than agreed, a cartel member can increase its share of the cartel`s profits. As a result, every member of the cartel is encouraged to cheat. If all members were deceived, the agreement would obviously cease to gain monopolies and there would be no more incentive for companies to stay in the agreement. The problem of fraud has tormented both the OPEC cartel and other cartels and may explain why there are so few cartels. An agreement is an agreement between competing companies to obtain higher profits. Agreements generally occur in an oligopolistic industry where the number of sellers is low and the products marketed are homogeneous. Cartel members can agree on price fixing, total industry production, market share, customer distribution, allocation of territories, supply manipulation, creation of common distribution agencies and profit sharing. Prisoner Dilemma: Betray the dominant strategy for both players because it ensures a better individual result, regardless of what the other player does. However, the result is not perfect. Both players would have been better off if they had cooperated.
Like the prisoner`s dilemma, cooperation in an oligopoly is difficult to maintain, because cooperation is not in the best interests of the various actors. However, the collective bottom line would be improved if companies cooperated and were thus able to maintain low production, high prices and monopolistic profits. The accuracy of the Cournot or Bertrand model will vary from industry to industry. While capacity and power can be easily modified, Bertrand is generally a better model of duopoly competition.