Key Terms Cartel: A group of businesses or nations that collude to limit competition within an industry or market. Of late, this strategy has become ineffective due to the enactment of anti-trust laws everywhere.

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. The prisoners are separated and left to contemplate their options. Let us now see how the cartel works and determines its price and output.

In the Bertrand model, firms set profit-maximizing prices in response to what they expect the competitor to charge. In fact, in oligopolist industry, there is a natural tendency for collusion. It is, thus, a perplexing market structure.

Duopoly Example The Cournot model, in which firms compete on output, and the Bertrand model, in which firms compete on price, describe duopoly dynamics. Given the large number of possible reactions, we come up with different models based on different assumptions about the behaviour of the rival sellers, the extent and form of exit and entry, the likelihood of collusion between firms.

A good recent example has been the dispute between the US competition authorities and Apple who have been accused of trying to force higher the prices of e-books through collusion with the major book publishers.

Game Theory Applications to Oligopoly Game theory provides a framework for understanding how firms behave in an oligopoly.

One important characteristic of an oligopoly market is interdependence among sellers. At an extreme, the colluding firms can act as a monopoly. This set of strategies is thus a Nash equilibrium in the gameāno player would be better off by changing his or her strategy.

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Collusive Oligopoly