Formal Agreement To Set Prices

Neither company has reason to change its strategy. If the company raises prices, it will lose all its customers. If the company reduces the P < MC price then it will lose money on each unit sold. [17] When oligopotic companies think about how much they must produce and the price they have to charge, they are tempted to cooperate with other companies to claim that they are a single monopoly. Joint action allows oligopolistic companies to maintain industrial production, demand a higher price and share profits. If companies work together in this way to reduce production and keep prices high, it is called collusion. A group of companies that have entered into a formal agreement to produce monopoly production and sell it at the monopoly price is referred to as an agreement. Even if oligopolists realize that they would benefit as a group by acting as a monopoly, each oligopoly faces a private temptation to produce a slightly higher quantity and make slightly higher profits – while continuing to sty as other oligopolists keep their production low and keep prices high. If at least some oligopolists give in to this temptation and start producing more, then the market price will fall.

A small handful of oligopoly companies would end up competing in such competition that they did not make economic profits, as if they were perfect competitors. This situation is called Cut Throat competition and is presented in Figure 1 of Qcc and Pcc. Since Pcc is the average cost, companies break right at the end. While it is illegal in many parts of the world for companies to set prices and drive a market, the temptation to make higher profits makes it extremely tempting to oppose the law. The motivation behind this shift is the idea that, in an oligopolistic or monopolistic market, companies will not increase their prices, because even a small price increase will lose many customers. This is because competitors will generally ignore price increases in the hope of gaining more market share, since they now have comparatively lower prices. But even a significant drop in prices will win only a few customers, because such an action will launch a price battle with other companies. The curve is therefore more elastic for price increases than for price decreases.

The theory predicts that companies will enter the sector in the long term. The difference in the marginal income curve means that marginal costs can vary without the price of balance and the same volume changing. [19] Prices therefore tend to be rigid. Oligopolies become “ripe” when competing companies realize that they can maximize profits through joint efforts to maximize price control by minimizing the impact of competition. Because of their activities in countries where cartel and abuse legislation is imposed, oligopolists will tacitly cooperate, which is an agreement between market competitors to allow any participating competitor to make economic benefits comparable to those of a monopoly, while avoiding explicitly violating market rules.

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