There are two sellers selling a homogeneous good.

There is large no. of buyers in the market.

Both the duopolists have identical cost curves and each has a zero cost of production.

Each seeks to maximize his profit.

Each duopolist makes an output plan for a period.

Neither sets the price but each accepts the price of his product at which total planned output can be sold.

3. Collusive Oligopoly

In order to avoid uncertainty arising from oligopolistic inter-dependence, the oligopolist may enter into collusive agreements.

There are two types of collusions: -

a) Cartels

i. Cartels imply direct agreement among competing oligopolist.
ii. The aim is reducing uncertainty and maximization of joint profits.
iii. The firms appoint a central agency, which decides not only the total quantity and the price but also the allocation of production among the members of the cartel and distribution of profits among them.

There are two forms of cartels -

Cartels aiming at joint profit maximization.

Cartels aiming at sharing of the market.

In any cartel, success in the short run sets in motion events which make maintaining success nearly impossible. A successful cartel raises prices which encourage consumers to cut demand and potential producers to enter the market. The success of OPEC in the 1970s triggered conservation, substitution, and new production in the 1980s. While oil prices are currently at record lows in real terms (i.e., controlling for inflation), it is clear that in the history of OPEC, demand for oil will continue to rise. Moreover, the lack of major oil finds in the last twenty years implies (but obviously does not guarantee) that supply will grow only slowly. Unless a cheap alternative source of energy is discovered in the meantime, this combination of effects will create an environment conducive to cartelization.

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* Contributed by -
V. Venkata Raghvendra is an Engineering graduate with Electrical & Electronics as background. Currently working as sales promoter for MOTOROLA and pursuing Post Graduate Diploma in Management from Institute of Public Enterprise (IPE), Hyderabad.
Article posted on December 1, 2008.