Week 7A - COMM/FRE 295 October 19, 2010 Cartels and...

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1 COMM/FRE 295 October 19, 2010 Cartels and Homogeneous Goods Oligopoly
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2 Topics Cartels Description of Oligopolistic Industry Concept of Nash Equilibrium Cournot Model with Homogenous Goods – Concept of reaction curve – Graphical illustration of Cournot Nash Equilibrium – Mathematical solution to Cournot Nash model – Comparison of Cournot Nash & monopoly solution
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3 Overview Market structure Extremes: Perfectly competitive firms are price takers and use MC = P because MR = P Monopoly faces entire market demand curve and produces such that (P – MC)/P = -1/E d Intermediate: monopolistic competition and oligopoly Monopolistically competitive firms produce according to (P – MC)/P = -1/E d , but they are not strategic and there is free entry and exit by competitors Non-cooperative oligopolists also produce where (P – MC)/P = -1/E d but there are a small number of firms; barriers prevents entry; interactions are strategic
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Cartel (Cooperating Oligopoly) A cartel can be viewed in simple terms as a group of colluding oligopolists With homogeneous goods, colluding firms will agree to each restrict output in order to raise price toward the monopoly level With heterogeneous goods (e.g., venders in a food court), colluding firms will agree to not undercut price Cartels are illegal in many countries There are well-known stories of successful cartels which were eventually busted by the Competition Bureau (e.g., steel production, animal feed additives, diamonds)
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Cheating within a Cartel Fortunately for consumers, cartels are subject to the prisoners’ dilemma and often fail on their own accord Even when cartels operate without the threat of a fine (e.g., OPEC), agreements are difficult to maintain Cartels are most successful if potential gains are large, members are relatively similar and monitoring is easy (so internal penalties are easy to administer) Cartels are hard to maintain if different firms have different costs, which implies firms will argue over an appropriate set of market shares Cartels are also more likely to fail in a highly uncertain environment because cheating is more difficult to detect
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This note was uploaded on 01/03/2011 for the course COMM 290 taught by Professor Brian during the Winter '09 term at The University of British Columbia.

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Week 7A - COMM/FRE 295 October 19, 2010 Cartels and...

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