Question

Discuss three parameters for firms operating in an oligopoly market. Even when allowed to collude, firms in an oligopoly will choose to cheat on their agreements with the rest of the cartel. Why?

Answer 1

An oligopoly market is a special form of imperfect market where, the competition among the competitor may be different from each other if they are not colluding, or it may be restrictedly different if they are colluding. the criteria or the parameter that is required to be an oligopoly market operator.

1. The most important characteristic or the parameter is the no. of firms operating under oligopoly should be few in number. so only few are allowed to operate in the market or to control in the market.

2. barrier to entry is the point where the firms operating under the oligopoly market are differentiated from the other entries in terms of research and development and incumbent as an established player or having the patent which restricts the entry of new firms to operate in the same market.

3. Another characteristic of oligopoly is its product differentiation. if a firm can really make the difference in the product, maybe the chances to get a high share of profit out of it. although it is not a necessary condition if a firm can do the differentiation then it will have a real impact and command over the market.

4. price leadership is a another characteristic that may lead to the market. so it can happen that the collision is expected in the market as the other firms will take that firm as a leader and try to follow the firm so, these characteristics only possible when the firms will collude.

In an oligopoly cartel, there is a chance of cheating when they are operating in it. the examples of the OPEC group. the countries are producing under cartel. Here the production of each company is fixed under the cartel but some of the firms would like to extract more than the agreed quantity to exercise the economies of scale. here the impact is on the price fixation and the operation under a given restriction been violated. there may be a chance of decrease in the price of crude oil. so here the cartel should follow strictly the rules of cartel or the failuer of cartel may be create teh price l;eadership rather then acartel.