Manag., July-2018 – Q4
- Option : C
- Explanation : Collusion Model—The Cartel: In oligopolistic market situations, organizations are indulged in high competition with each other, which may lead to price wars. For avoiding such types of problems, organizations enter into an agreement regarding uniform price-output policy. This agreement is known as collusion, which is opposite to competition. Under collusion, organizations are involved in collaboration with each other to take combined actions for keeping their bargaining power stronger against consumers.
According to Samuelson, “Collusion denotes a situation in which two or more firms jointly set that prices or output, divide the market among them, or make other business decisions.
”Some of the benefits of collusion are as follows:
(i) Helps organizations to increase their performance
(ii) Helps organizations in preventing uncertainties
(iii) Provides opportunities to prevent the entry of new organizations
Cournot’s Model of Oligopoly: Augustin Cournot, a French economist, was the first to develop a formal oligopoly model in 1838 in the form of a duopoly model. Cournot developed his model with the example of two firms, each owning a well of mineral water and water being produced at zero cost. To illustrate his model, Cournot made the following assumptions.
(a) There are two firms, each owning artesian mineral water well;
(b) Both the firms operate their wells at zero cost;
(c) Both of them face a demand curve with a constant negative slope;
(d) Each seller acts on the assumption that his competitor will not react to his decision to change his output and price. This is Cournot’s behavioral assumption.
Sweezy’s Kinked Demand Curve Model: The kinked demand curve of oligopoly was developed by Paul M. Sweezy in 1939. Instead of laying emphasis on price-output determination, the model explains the behavior of oligopolistic organizations. The model advocates that the behaviour of oligopolistic organizations remain stable when the price and output are determined. A kinked demand curve represents the behaviour pattern of oligopolistic organizations in which rival organizations lower down the prices to secure their market share, but restrict an increase in the prices.
Following is the assumption of a kinked demand curve: (i) Assumes that if one oligopolistic organization reduces the prices, then other organizations would also cut their prices.
(ii) Assumes that if one oligopolistic organization increases the prices, then other organizations would not follow increase in prices.
(iii) Assumes that there is always a prevailing price. The Price Leadership Theory: The key the behavioural assumption in the price leadership theory is that one firm in the industry—called the dominant firm—determines the price and that all other firms take this price as given. Suppose that there are ten firms in an industry, A–J, that firm A is the dominant firm, and that firm A is much larger than its rival firms. (The dominant firm need not be the largest firm in the industry; it could be the lowest-cost firm.) The dominant firm sets the price that maximizes its profits, and all other firms take this price as given. All other firms, then, are seen as price takers; thus, they equate price with their respective marginal costs.
The price leadership explanation suggests that the dominant firm acts without regard to the other firms in the industry and simply forces the other firms to adapt.
