Oligopolies may produce the same good or a differentiated product. The key distinction between oligopoly and other market structures is that there is a strategic interdependence between the firms in the market. Usually there are only a few firms in an oligopoly, but sometimes there are many, with a few very large ones that can exert some control over the market price.
a. The firms in an oligopoly would find it advantageous to form a cartel.
i. What is a cartel?
ii. What price would the cartel charge?
iii. That is, would they charge and price closer to what a monopolist would charge, or closer to the price that would prevail in a competitive market? Why? Briefly explain your answer.
b. Cartels are difficult to form and maintain.
i. Why is this?
ii. Even if they are legal (they are not in the U.S.), what would make it difficult for the firms to cooperate?
iii. Under what circumstances is the cartel more likely to be successful? Briefly explain your answer and give at least two difficulties.
c. Briefly describe at least one strategy a firm could use to encourage cooperation among the other firm(s) in their cartel.
d. Can oligopolies be efficient? Why or why not?