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When Firms In An Industry Reach An Agreement To Fix Prices

Similarly, a natural monopoly is created when the quantity required in a market is large enough to allow a single company to work at least on the average long-term cost curve. In such an environment, the market has room for only one company, as no small business can work at a low cost to compete at a low cost and no larger company has been able to sell what it produces, given the amount demanded in the market. Members of an oligopoly may also face a prisoner dilemma. If each of the oligopolists participates in the humiliation of production, high monopoly gains are possible. However, each oligopolist must be concerned that other companies, while curbing production, are using the high price by increasing production and making higher profits. Table 4 shows the inmate`s dilemma for a two-year-old oligopoly, known as a duopoly. If companies A and B agree to maintain production, they act together as a monopoly and earn $1,000 each. However, the dominant strategy of the two companies is to increase production, each making $400 in profits. The result of this ownership dilemma is often that, although A and B could achieve the highest combined profits by cooperating in the production of a lower level of production and acting as a monopoly, both companies could find themselves in a situation where they could each increase their production and earn only $400 in profits at a time. Clear It Up looks at a cartel scandal in particular.

Several factors are deterresing. First, pricing in the United States is illegal and there are antitrust laws to prevent business-to-business agreements. Secondly, coordination between companies is difficult and the number of companies involved is all the more important. Third, there is a risk of overtaking. A company may agree to meet and then break the agreement, undermining the profits of the companies that still maintain the agreement. Finally, a company may be deterred from collusion if it is not able to effectively sanction companies that could break the agreement. Assuming that the withdrawals of the two companies are known, what is the likely outcome in this case? In an oligopoly, companies are interdependent; they are concerned not only with their own decisions about the quantity to be produced, but also with the decisions of other companies in the market.