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Unformatted text preview: Comm 295 11.1, 11.4 Cartels, Monopolistic Competition Oligopoly : a market structure with only a few sellers and limited entry - Each can influence price- Need to consider behaviour of rivals harder to find profit-maximization decision - May act independently or coordinate their actions Cartels : when firms coordinate over prices or quantities collusion of a group of firms that act like a monopoly collectively earn monopoly profit or higher profits - Firms who do not collude earn less profit than a monopoly but still earn positive economic profits in long run- Limitations on entry keep number of firms small Monopolistic competition : a market structure in which firms have market power, but there is free entry in the long run so entry occurs until no additional firm can enter and earn a positive long run profit 11.1 CARTELS- Oligopolistic firms have an incentive to form cartels to collude over prices or quantities so as to increase their profits- Normally illegal - May fail as firms have an incentive to cheat on the cartel to make more money WHY CARTELS SUCCEED OR FAIL- Firms have collective incentive to form a cartel in which each firm reduces its output, leading to higher prices and higher profits than working independently Why Cartels Form- Members of cartel believe that they can raise their profits by coordinating their actions - Cartel takes into account how changes in any one firms output affect the profits of all members of cartel...
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This note was uploaded on 12/07/2011 for the course COMM 295 taught by Professor Ratna during the Winter '09 term at The University of British Columbia.
- Winter '09