Under what conditions will the oligopolists agree to co-operate in their decisions

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Let us suppose that the owners of any one of the firms think that the market price will not fall if they start selling more than that quantity.
If they take Pm as price lying beyond their influence, then their profit maximizing output will be q’, under which Pm=MC. If the market price does not decrease, the firm can increase its profits from PmABC to PmFGH by producing above the quota.
Just one firm could be able to increase its output without causing any significant decrease in market prices. Let us suppose, however, that all producers start producing above their quotas in order to maximize their profits under “cartel”[4] prices Pm. The industrial output would then increase to Q’, under which Pm=MC, which will result in excess supply as at that price the demand would be lower than the supply. Consequently, prices will fall until the market clears, i.e. till they become equal to Pc and the producers will come back where they have initially started.
Cartels usually try to penalize those who cheat with quotas. The main problem however occurs when the cartel price gets set up, some firms, aiming to maximize their profits, could earn more by cheating. If everyone is cheating the co-operation agreement breaks down as profits fall to 0.

1. Grebenschikov P.I., Leusskiy A.I., Tarasevitch L.S, Microeconomics, St.

Petersburg 1996., pp. 213- 216
2. Livshits A.Y. Introduction to the Market Economy, Moscow 1991, pp.158-

161
3. McConnell C.P., et al., Economics, Moscow 1993, pp. 125-7
4. Begg D., Fisher S., Dornbusch R., Economics, 5th ed., McGraw-Hill 1997, pp. 151-51, 176, 146, 148
5. Lancaster K., Introduction to Modern Microeconomics, 2nd ed., N-Y 1974, p. 200-1
6. Nicholson W., Microeconomic Theory, 7th ed., The Dryden Press 1998, pp.

580-4

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