However, the optimal outcome for companies is the agreement (high price, high price) The question of whether this happens depends on the incentive to continue to conclude an agreement If the oligopolites individually pursue their own interest, they would produce a total quantity greater than the monopoly quantity and demand a price lower than the monopoly price and, therefore, a lower profit. The promise of greater profits encourages oligopolites to cooperate. However, collusive oligopolies are inherently unstable, as the most efficient companies will be tempted to break ranks by lowering prices to increase market share. Suppose there are two companies in the toaster market with a particular demand function. Company A will determine Company B`s production, keep it constant, and then determine the rest of the toaster demand in the market. Company A will then determine its profit-maximizing production for this residual demand, as if it were the entire market, and produce accordingly. Company B will at the same time perform similar calculations regarding Company A. As regards tendering for construction works in the public sector, construction companies would cooperate to set artificially high prices. Companies would choose the contracts they wanted and their rivals would offer high prices. This is a practice known as « cover pricing ». Successful companies have often rewarded competitors with a secret payment to avoid competition. One of the ways in which the two aforementioned companies could maximize their value is to consolidate into a single company, either by buying the other or by selling the other to a third party who would be willing to pay them more than the present value of the future Cournot equilibrium gains to create a single monopolistic enterprise. The problem is that, in most advanced industrialized countries, these measures would likely come up against a legal ban or subsequent state regulation.
An agreement is an agreement between competing companies to work together to make higher profits. Cartels usually occur in an oligopolistic industry where the number of sellers is small and the products traded are homogeneous. The members of the cartel can agree on these issues: price fixing, total industry production, market share, customer allocation, allocation of territories, supply agreements, creation of joint sales agencies and profit sharing. Given the constant production of the other company, the demand for the production of the different company is much more elastic than the demand of the sector, and the marginal turnover of the derogating company called MR is also much flatter and closer to the demand curve of the company if it increases its production beyond what was agreed in the collusion agreement. The collusive curves of demand and limit yields are given by the pointed lines of the image, which extend from the h point to the right. The demand curve of the different entity must pass through the collusive demand curve for the collusive equilibrium of prices and volumes. When the deviant entity increases its production of dq while the other maintains its production at the collusive level, the market price decreases by 0.0325 dq, as shown in equation 1 with dQ = dq . As we have shown in cournot.
Rou, to assimilate its marginal costs to its non-collusive marginal turnover curve, the company increases its production to 518 thousand units, lowers the market price of the property to 39.03 $US and raises its profit to 5643.54 thousand dollars. Its collusive partner, whose production must remain unchanged, suffers a reduction in its profits from the previous monopoly level from 5187.85 to 4014.43 thousand dollars. The dissident company increases its profits by $455.69 thousand, while the other company loses $1173.42 thousand, with a net loss for both companies together of $717.73 thousand. . . .