2. โข In order to avoid uncertainty arising out of interdependence and to avoid
price wars and cut throat competition, firms working under oligopolistic
conditions often enter into agreement regarding a uniform price-output
policy
โข The agreement may be either formal (open) or tacit (secret)
โข But since formal or open agreements to form monopolies are illegal in most
countries, agreements reached between oligopolists are generally tacit or
secret.
โข When the firms enter into such collusive agreements formally or secretly,
collusive oligopoly prevails
3. โข collusions are of two main types:
โข (a) Cartels and
โข (b) Price leadership.
โข In a cartel type of collusive oligopoly, firms jointly fix a price and output policy
through agreements
โข Originally, the term โcartelโ was used for the agreement in which there existed a
common sales agency which alone undertook the selling operations of all the firms
that were party to the agreement.
โข But now-a-days all types of formal or informal and tacit agreements reached among
the oligopolistic firms of an industry are known as cartels.
4. โข Since these cartels restrain competition among the member firms,
their formations have been made illegal in some countries by the
Governments passing laws against them.
โข For instance, the formation of a cartel is illegal in U.S.A. under the
Anti-Trust Laws passed there.
โข However, in spite of the illegality of cartels they are still formed in
U.S.A. through secret devices and by adopting some means or the
other shrewd businessmen are able to evade the anti-monopoly laws.
5. โข Formal collusion or agreement among the oligopolists may itself take various forms.
โข An extreme form of collusion is found when the member firms agree to surrender
completely their rights of price and output determination to a โCentral
Administrative Agencyโ so to secure maximum joint profits for them.
โข Formation of such a formal collusion is generally designated as perfect cartel.
โข Thus under perfect cartel type of collusive oligopoly, the price and output
determination of the whole industry as well as of each member firm is determined
by the common administrative authority so as to achieve maximum joint profits for
the member firms.
6. โข The total profits are distributed among the member firms in a way already
agreed between them
โข under perfect cartel, the central authority determines the separate outputs to
be produced by the various members and the price they have to charge in the
same way as a monopolist operating multiple plants would do.
โข Now, the question arises as to what outputs different firms in a cartel will be
asked to produce so that the total cost is made minimum.
โข Total cost will be minimised when the various firms in the cartel produce
such separate outputs so that their marginal costs are equal
7.
8. Market sharing Cartels
โข Market-Sharing by Non-Price Competition:
โข Under market sharing by non-price competition, only a uniform price
is set and, the member firms are free to produce and sell the amount
of outputs which will maximise their individual profits.
โข Though the firms agree not to sell at a price below the fixed price they
are free to vary the style of their product and the advertising
expenditure and to promote sales in other ways.
9. Market-Sharing by Output Quota:
โข The second type of market-sharing cartel is the agreement reached between
the oligopolistic firms regarding quota of output to be produced and sold by
each of them at the agreed price
