ECONOM 1014 Lecture Notes - Lecture 20: De Beers, Strategic Dominance, Production Quota

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27 Mar 2017
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Oligopolies are not a single firm considering its own costs & prices independently (like competitive firms & monopolies) Attempt to move a market from competitive to what would occur if it were controlled by a single monopoly. Work best for commodities with limited geographic options for entry. Manufacturing cartels don"t always last in the long-run (because many firms may enter due to high profits) Set overall production level at monopolist quantity (maximize profits) Then set production quota (divide production by # of firms) But what if a firm cheats? (produces more than agreed upon) If they produce more, market price will go down. But they get more benefits (from extra profit) and a fraction of the loss. Every firm in a cartel has a strong incentive to cheat! Start with firm a: find most profitable behavior based on what firm b does. Look at firm b: find most profitable behavior based on what firm a does.

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