Question

Compare monopoly market structure profit scenario with oligopoly market
structure profit scenario which is enjoyed after cartel formation, by drawing their
separate diagrams, and explain in words in what condition they enjoy profit.

Answer 1

Monopoly is the market for one seller. Monopoly has no close substitutes. Monopoly attain maximum profit not because price is high or minimum costs, but the entry is blocked. So it can earn abnormal profit. Monopoly maximise its profit when MR is equal to MC. It always fixes the price which is greater than ita marginal cost. Monopoly always try to restrict its output by increasing its price. The maximum output sold by monolist when its elasticity is equal to one
Oligoplyist output and price are indeterminate. All oligopolistic firms are interdependent, because of rival's action if any firm changes its price, output, product design etc. In order to avoid the uncertainity arising from oligopolistic interdependence is to enter cartel agreement. Cartel implies direct agreement among the competing oligopoly with the aim of reducing uncertainities arising from their mutual interdependence. Under cartel agreement, firms appoints a central agency as an authority, which decides the total quantity and price and also allocates production and distributes maximum joint profit among members. Maximum profit is determined by intersection of MC and MR.Under market sharing cartels, all firms agree to sell any quantity demanded at a fixed price by bargaining low cost and high cost firm. Firms compete on non price basis. Under some cartels, firms will agree to sell same quantity at agreed price