Main Constraints of the Cartel in Collusive Oligopoly
Here we understand the Concept of Cartel and its main Constraints in detail.
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Main Constraints of the Cartel in Collusive Oligopoly
Cartel is a perfect form of collusion. Perfect collusion by oligopolistic firms in the form of a cartel has certain advantages like avoidance of price-wars among competing firms, charging a high price for the product and the maximisation of joint profits. There are many difficulties faced by a cartel and as a result the objective of joint profit maximisation may not be achieved.
Main Constraints of the cartel are as follows:
- It is very difficult to make an accurate estimate of the market demand curve. Each firm may claim that its own demand curve is more elastic than the market demand curve and this will make the estimation of market price inaccurate by the cartel.
- The estimate of market marginal cost curve may be inaccurate because the supply of wrong data about their marginal cost curves by the individual firms.
- If demand conditions are unstable, it will result in differences among oligopoly firms as to their demand projections. May prove to be a potential area of conflict among them.
- The larger the number of firms in a cartel, it becomes costlier to arrive at and maintain collective agreements. Such type of agreements may break down in the event of an increase in the number of firms because of distrust, threatening and bargaining resorted to by them.
- Secret price cuts by rival oligopoly firms is another constraint. It may be possible that some of the firms may resort to secret price cuts and these cuts may be difficult to detect, for eg, providing better credit facilities, delivery and other related services free to the customers etc. In case of differentiated products, improvement in quality, brand etc. may be used as competitive weapons by the rival firms. All these render collusive agreements on price and output of limited value.
- If the oligopoly price is high, than there is possibility of entry of new firms and the desire to have a good public image by charging a fair price are some of other factors which prevent a cartel to pursue the aim of joint profit maximisation. Fear of Government control also acts as a constraint.
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Collusive Oligopoly - Cartel - Main Constraints of the Cartel.
Kinnari
Tech writer at NewsandStory