The Cartel or Collusion Model

The cartel is an explicit agreement between the oligopoly firms. Cartel agreements represent the most complete form of collusion among the oligopolists. Under cartel agreements, firms jointly establish a cartel organization to make price and output decision, to establish production quotas for each firm and to supervise the market activities of the firm in the
industry, cartel type collusions are formed with a view.
i) Eliminating uncertainty surrounding the market and, 
ii) Restraining competitions and thereby ensuring monopoly gains to the cartel group.
For this, the board of control first calculates the MC and MR for the industry; MC for industry in the summation of MCs of individual firms. On the basis of industry’s MR and MC, the total output for the industry determined. The determination of industry output is shown in figure C and the share of each firm in figures A and B. For the sake of convenience, let us suppose there are only two firms in the industry, firm I and II. Their cost curves are given in figure C the industry output is determined at OQ and price PQ on the pattern of monopoly firm.

The share of each firm in industry, quantity is determined at the level of their own output which equates their individual MC with the industry’s MC. The industry’s MC, CQ is determined by the intersection of industry’s MC and MR at point C. The market share of each firm can be obtained by drawing a line from point C and parallel to X-axis through MC to MC1 to the Y-axis. The points of intersection C1 and C2 determine the level of output for firm I and II respectively. Thus, the share of each of the two firms I and II, is determined at OQ1 and OQ1 where OQ1 + OQ2 = OQ. The total profit can be completed as (PQ – Firm’s AC) and firms output which is maximum. The total profit may be different, but there will be no motivation to change in price quantity combinations, since their individual profit is maximum.

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