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.What conditions are likely to be conducive to the successfuloperation of a cartel? Under what circumstances must govern-ments be most vigilant to protect the interests of consumers?Collusion is most likely to succeed:1 the smaller the number of rival producers and the higher thebarriers to entry;2 where the interests and objectives of each producer aresimilar;3 where the product is homogenous, difficult to differentiateand thus highly substitutable;4 where the actions of each producer are highly visible to all;5 where market demand is stable;6 where legal restrictions can be easily bypassed or bought off.Ol i gopol y DemandThe demand curve for the firm  which shows the relationshipsbetween the price of the product and its quantity sold  given theoligopoly conditions just described can be quite unique.Considerwhat would happen if one of the rival corporations was determined© 2004 Tony Cleaverto change its selling price: as Firm A cuts its price, so too wouldFirms B, C, D and E.The sales of all products in the market placemay grow a little overall but the individual demand for each firmwould not change by much.If, in contrast, Firm A puts its price upthen it is unlikely that any of its rivals would follow suit.Firms B,C, D and E would benefit from extra sales if they kept their priceslow, picking up consumers of product A who would now switch tothe rivals lower price alternatives (Box 3.4).Box 3.4 Price stickinessWith asymmetric demand in the market for the products ofoligopoly, the shape of each firm s AR/demand curve would bekinked at the point of the current ruling price, P as illustrated inFigure 3.6.Demand for the oligopolist s product is price-elastic aboveprice P and price-inelastic below P.Note the MR curve that isderived from a kinked AR/demand curve is shown as vertical atquantity Q.What this implies is that  since the oligopolistmaximises profit at that output where MC equal MR  no matterif production costs increase quite considerably (e.g.anywherePrice/revenuePCDemand/ARMROutput0QFigure 3.6 The oligopolist s demand curve.© 2004 Tony Cleaverfrom 0 to C ) price and output will still not change.This isshown in Figure 3.7.Adding the oligopolist s cost structure to the pattern ofdemand identifies the firm s equilibrium price P* and output Q*.Abnormal profits are given by the box (P* C*)Q*.Note thatthe effect on this equilibrium of any increase or decrease of MCand AC here would be minimal, whereas a shift back in demand(AR) caused by any increase in competition from rivals wouldhave, in contrast, a serious impact on price, output and profits.Price/costs/revenueMCP*ACC*ARMROutput0 Q*Figure 3.7 Profit-maximising oligopoly.Prices under oligopoly tend to be stable, therefore.At least they willbe so for relatively long periods until something occurs to upset theequilibrium.The sudden appearance of a new competitor, a techno-logical breakthrough or a revolutionary new product or processmay then turn the relative stability of the status quo into turmoil.For a brief period, an intense battle over market shares will takeplace as the original  pecking order or hierarchy between rivals ischallenged.Cut-throat price competition may be resorted to inorder to eject an upstart interloper from the market place or to re-examine the economic efficiency and thus supremacy of theremaining firms.After a period of aggressive activity where short-term profits are sacrificed in the quest for a new order, eventual© 2004 Tony Cleavercalm will be restored as all survivors realise that mutual interestsare best served again by tacit collusion.A highly dramatised and fictional (?) illustration of oligopolisticconflict is given in the novel The Godfather by Mario Puzo  afascinating study of rivalry between New York Mafia organisationswhich gives new meaning to cut-throat, corporate blood-letting!Only slightly less colourful have been reports on the antics ofinternational airlines in trying to carve up North Atlantic passengerroutes [ Pobierz caÅ‚ość w formacie PDF ]