What is the difference between price leadership in an oligopoly and in a cartel arrangement

Expert Solution

Cartel is an explicit, formal agreement among the firms in an industry for the fixation of production quantity and price. Oligopoly is a market structure where many sellers have their presence in one single market and small number of large firms dominates the market.

There are a numerous of oligopolistic firms in the market; however one of them is dominant firm, which is called price leader. Price leadership occurs when there is only one dominant firm in the industry that sets the price and others follow it. Conversely in a cartel arrangement, the members of cartel choose their combined output at the level where their combined marginal revenue equals their combined marginal cost. The price in cartel arrangement is determined by market demand curve at the level of output chosen by the cartel. Under cartel prices are fixed by cartel members thus are unusually high; and moderate/fair pricing exist in an oligopoly due to market competition.

Rahul Sunny answered 2 years ago

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