Question

Under collusive oligopoly, firms cooperate and work together to determine the output and the price levels in a particular market.

Short answer

Question: Explain the process of determining output and price levels in a collusive oligopoly.

Step-by-step solution

Understand Collusive Oligopoly

A collusive oligopoly occurs when a few large firms in an industry cooperate to determine the output and price levels, instead of competing with one another. In such a situation, firms agree to set prices and output levels that enable them to maximize joint profits. This can be achieved through either informal agreements or formal organizations like cartels.

Understand the Types of Collusive Arrangements

There are two main types of collusive arrangements: explicit collusion and tacit collusion. - Explicit collusion: Firms openly agree on the prices and output levels, and this type of collusion is illegal in most countries (e.g., cartels). - Tacit collusion: Firms indirectly coordinate their pricing and output decisions, usually by observing each other’s actions and adjusting their own strategies accordingly.

Determine Demand Curve and Marginal Costs

In order to find out the output and price levels in a collusive oligopoly, we first need to determine the market demand curve and the firms' marginal cost curve. The demand curve represents the relationship between the price and quantity demanded of a good or service, while the marginal cost curve shows the cost a firm incurs in producing one more unit of the good or service.

Find the Output and Price

Once we have the demand and marginal cost curves, we can find the output and price levels for a collusive oligopoly. To do this, we need to: 1. Sum the marginal cost curves of the individual firms to get the industry's marginal cost curve. 2. Find the point where the industry's marginal cost curve intersects the market demand curve. This point represents the equilibrium output that maximizes joint profits for the collusive firms. 3. Determine the price level by looking at the market demand curve at the equilibrium output.

Allocate Output Among Firms

After determining the output and price levels for the collusive oligopoly, the firms need to agree on how to allocate the output among themselves. This allocation can be based on factors such as production capacity, historical market share, or other negotiated terms.

Monitor and Enforce Collusion

To maintain the collusive arrangement, firms need to monitor and enforce compliance among the participating firms. This may involve observing each other's pricing and output decisions, creating a mechanism for sanctioning firms that deviate from the agreed-upon terms, and ensuring that new entrants into the market do not disrupt the collusion. In conclusion, understanding the concepts of a collusive oligopoly provides insight into how firms work together to determine output and price levels in a market. By following these steps, we can analyze the process of determining output and price levels within a collusive oligopoly.