QuasiCompetitive Model A model of oligopoly pricing in

Quasi-Competitive Model • A model of oligopoly pricing in which each firm acts as a price taker even though there may be few firms is a quasicompetitive model. • As a price taker, a firm will produce where price equals long-run marginal costs. • This equilibrium will resemble the perfectly competitive solution, even with few firms.

P P P MC MC D 1 Firm 1 MC DIND D 2 Firm 2 Industry

Quasi Competitive Model Industry Price P C C MC D MR 0 Q C Quantity per week

Cartel Model • Firms collude on price and/or quantities • They act as if they are a monopoly • They set an industry price where MRi = MCi • The cartel model is not efficient • Side payments are necessary to equalize profit

Cartel Model • Maintaining this cartel solution poses three problems: – Cartel formations may be illegal, as it is in the U. S. by Section I of the Sherman Act of 1890. – It requires a considerable amount of costly information be available to the cartel. • The market demand function. • Each firm’s marginal cost function.

Cartel Problems • Illegal in the U. S. • Side Payments are difficult • Incentives to Cheat https: //www. youtube. com/watch? v=t 9 Lo 2 fgx. WHw • Relationships between members is complex

Cartel Model • A model of pricing in which firms coordinate their decisions to act as a multiplant monopoly is the cartel model. • Assuming marginal costs are constant and equal across firms, the cartel output is point M • The plan would require a certain output by each firm and how to share the monopoly profits.

Cartel Model P Industry MCi=SMC 1+MC 2 P MC 1 Firms MC 2 Pi MRi Qi MRi=SMC 1+MC 2 Companies unite to maximizes industry profit Di MRi Q Q 1 Q 2 Di Q

Cartel Model Price P P P M M A A C C MC D MR 0 Q M Q A Q C Quantity per week

Formal Model of Price Leadership Model Price SC P 1 D’ P P L 2 MC MR’ 0 Q C Q Q L T D Quantity per week